EDITOR: Governor Romney is pushing tax code reform. President Obama says he’s all for it. Simpson-Bowles said the same thing. Well, duh! Our online community achieved consensus — a rare event — on this topic years ago. The only question left is which “loopholes” to eliminate. Consensus on that topic will be a nut of a different texture.
As a free market zealot, I think all deductions, credits, write-offs, subsidies, etc., ad nausea, must be eliminated. The only exception is personal and dependent exemptions to adjust for the poverty line. Every free marketeer knows what these “tax code expenditures” do to markets, and it is repulsive.
Representative McClintock was criticized for voting against repeal of oil company subsidies. I say good on him for knowing the folly of sacrificing only one sacred cow; every special interest has them; if we don’t kill them all — including our own — we’ll get a rats nest of lobbyists and lawyers gumming up the entire works. Finally, how else are we going to get the politicians to vote for eliminating funding for their conventions?
The middle class’ most sacred cow is the mortgage interest deduction. It artificially inflates mortgage interest rates and results in a direct transfer of tax dollars to lenders. How much? If your tax rate is, say, 20 percent, your effective interest rate is lowered by the same amount … 5 percent becomes 4 percent. The markets have reached equilibrium at an effective rate of 4 percent, with the extra 1 percent fed to the lenders.
Now let’s pretend this deduction disappears for any contract signed after midnight tonight. What happens next? Markets would suffer a short period of chaos as they seek a new equilibrium. Markets are made up of millions of independent decision makers pursuing their own interests on the margin’s razor edge. That was true before and after midnight. Therefore odds are real good that a month later the same hypothetical mortgage would sell for real close to an effective rate of 4 percent.
A simple — as opposed to “simplified” — tax code is so worth it. The efficiency gains associated with a post card-sized tax form is mind boggling. Just think of all those unemployed lobbyists … a free marketeer’s dream come true. I urge Mr. McClintock to fight for this with all his might.