Republican presidential hopeful Mitt Romney wants to lower tax rates. Newly minted Republican vice-presidential hopeful Paul Ryan wants to cut spending by taking on Americas entitlement culture. The new ticket can marry these two ideas and make them relevant to todays economic stagnation by introducing a plan to eliminate the biggest middle-class entitlements of all: cheap mortgages and employer-provided health care.
Romneys Believe in America campaign blueprint and Ryans Path to Prosperity budget map present the candidates viewpoints clearly. Romney wants a fundamental redesign of our tax system. Personal income-tax rates should decline by a fifth, he says, with a top rate of 28 percent. Hed also eliminate investment taxes for people making under $200,000, erasing a huge source of tax-time complication with one stroke. To pay for tax-rate reductions—to keep his tax reform revenue-neutral, in wonk parlance—hed make the tax code simpler and more efficient. These are code phrases for taking away deductions, though he doesnt say which ones. Ryan is more aggressive, saying that hed cut the top rate to 25 percent for wealthier earners and 10 percent for middle-class earners. Hed pay for these lower rates by clear[ing] out special interest loopholes that benefit the politically well-connected, distort economic growth, and encode unfairness in law. All fine—but Ryan, like Romney, never says which loopholes he would eliminate.
Like Willie Sutton, Romney and Ryan and should target the places where the money is. Between 2010 and 2014, according to Congresss Joint Committee on Taxation, the federal government will spend $659.4 billion on allowing employers to pay for their employees health insurance with pretax income and $484.1 billion on allowing homeowners to deduct their mortgage-interest costs from their income. These are the two biggest tax breaks for individual filers (the first of the two counts as an individual break, not a corporate one, because it benefits individual people).
If Romney and Ryan are looking for tax breaks that distort economic growth, they dont have to look far beyond these two items. Employers paying for workers health care out of money that they would otherwise pay in salary makes it impossible to create a real market for individual health insurance. Only when the majority of working Americans see how much health insurance actually costs for the little that they get, and stop thinking of it as a perk of working for the Man, will we finally see real health-care reform. The result would be a system in which people used their own money to buy health care on an open market, just as they buy almost everything else. (Congress would still have to take some protective measures, such as outlawing price discrimination—a doctors or hospitals charging different prices for customers depending on their insurance profiles.)
The mortgage-interest deduction also distorts the American economy. Between 2000 and 2007, mortgage debt doubled, and the government subsidized much of that borrowing. People could buy houses that they couldnt afford and justify the purchases by saying they were lowering their taxes. Washingtons treatment of mortgages has created a vicious cycle, with cheap debt pushing up house prices and requiring still more cheap debt to fund home purchases.
Romney and Ryan should pledge to free Americans from these Washington-devised traps. The candidates could propose a bill that would gradually phase out both deductions, removing 10 percentage points of todays benefit each year over a decade until there was nothing left. Such a proposal would constitute a cut in spending, though critics on both the left and the right would condemn it as a tax hike. When the government pays you to borrow hundreds of thousands of dollars to buy a house, its spending money. When the government gives you generous deductions for acting in a particular way, its spending money.
The candidates and their advisors might blanch at taking on these popular deductions, and for good reason: voters would howl. People wouldnt like paying more—directly, at least—for health care than they had before, and they wouldnt want to lose an arrangement in which someone else pays for such a big chunk of their home-mortgage expenses. But then, welfare recipients didnt like it at first when the feds reformed welfare. For that matter, todays Americans shouldnt feel grateful that the government rewards them for behaving exactly the way that it wants them to behave. They should feel insulted.
The GOP must attack these hidden entitlements. How will Washington ever be able to reform Medicare if it cant even tell affluent people that it will no longer pick up part of the tab for their four-bedroom house? Whats the point of going after corporate-tax loopholes when the two biggest corporate-tax breaks constitute barely a tenth of the money that Washington spends each year on employer-paid health care and mortgage interest? How can Washington cut food stamps when its subsidizing Lipitor and Ambien for the middle class?
If Romney and Ryan make genuine tax reform a key part of their agenda, the election will show who Americans really are. Do we want fair taxes that enable individual choice? Or do we want a government that hands out goodies when we do what it wants us to do? However we answer, its better to know sooner than later.