On Wednesday, Jeb Bush announced his plan for overhauling the US federeal income tax. It’s a mixture of innovative ideas, standard GOP tropes, and wishful thinking, but it’s also the most concrete plan that any of the presidential candidates have put forward. I’m not going to spend a ton of ink on the specifics—I don’t think I can say much more in that respect than the Tax Policy Center did[fn1]—but I want to address a couple things in his proposal.
First, Bush argues that, “[a]t 80,000 pages, it’s a tax code only an army of tax accountants and lobbyists could love—because they’ve written it.” And he’s absolutely right—an 80,000-page law would be totally and completely unwieldy.
Which is why it’s a good thing that the Internal Revenue Code (that is, the tax code) isn’t 80,000 pages. Or anywhere near it. The two-volume copy of the Code that I keep on my desk at work (this one) is 5,296 pages total. That’s a lot of pages, but nowhere near 80,000. And a significant portion of the books (like, probably half) is actually legislative history, helpful to a tax attorney but explicitly not part of the tax code.
Of course, maybe Bush is using “tax code” colloquially, and is including in his count the regulations. I have six volumes of the regulations and proposed regulations sitting on my desk next to the two volumes of the Code. I don’t actually know how many total pages they have, though, because the pagination is idiosyncratice. For example, the last volume runs through page 75,005, then skips to 92,101. And the first volume starts on page 20,001. I didn’t feel like flipping through all of the volumes and looking for other big number skips, but assuming there are no other skips, there are, at most, about 50,000 pages of regulations. Which is a lot of pages but, again, the regulations are not the tax code. And even if Bush means to include them in his count, it doesn’t get to 80,000.
Bye-Bye Mortgage Interest Deduction
Bush’s plan would eliminate the deductions for state and local taxes and cap most personal deductions (other than the deduction for charitable giving) at 2% of adjusted gross income. Effectively, this means the mortgage interest deduction goes away for most Americans.
While academics and policymakers have been talking for years about eliminating the mortgage interest deduction, it’s been politically toxic. So why does Bush think he can get it through?
I’m not entirely sure, but I suspect that, in large part, it’s because he mostly doesn’t eliminate the mortgage interest deduction for most people; it just gets subsumed by the standard deduction.
Already, in fact, many people’s mortgage interest deduction (and, for that matter, deduction for state and local taxes) is subsumed by the standard deduction. Why? Because they’re itemized deductions; when you pay your taxes, you have to choose between taking your itemized deductions and taking the standard deduction. This year, the standard deduction is $12,600 for a married couple filing jointly.
That means that if the sum of your itemized deductions (which, for most people, means mortgage interest deduction, charitable deduction, and deduction for state and local taxes) is $12,600 or less, you don’t actually deduct them—you just take the standard deduction.
Under Bush’s proposal, he would nearly double the standard deduction. Let’s say that means $24,000 for 2015. How does that play out?
In 2010, the median house cost $221,800. Arbitrarily, let’s adjust that up to $250,000. As I’m writing this, the average interest rate on a 30-year mortgage is sitting at 3.90%. That number’s likely headed up, so let’s make that an even 5%. If you take out a 30-year mortgage for $250,000 at 5% interest, in the first year, you’ll pay $12,416 of interest. Which means you’ll have almost another $11,600 of itemized deductions before you even think about choosing not to take the standard deduction. By the same token, even if you’re paying several thousand dollars in state income taxes, the increased standard deduction means that you’ll be indifferent to the loss of their deductibility.
In fact, even though Bush claims that his plan maintains the charitable deduction, for most Americans, that deduction is also likely to be subsumed into the standard deduction, unless he takes it out of the itemized deduction basket.
Bush’s proposal to (effectively) end the mortgage interest deduction is conceptually interesting, even though it is likely to have very little practical effect. He’s found a way that, properly explained, he can make the unthinkable palatable (though I’d be at least moderately afraid that, in the process of drafting the legislation, the increased standard deduction made it through, but the loss of the mortgage interest deduction didn’t).
The claim that the tax code has 80,000 pages is also innovative, though not really in a good way. The only way I can see getting that many pages out of the tax code—or, more broadly, the Code and the regulations—is by using really big font. Or really small pages.
[fn1] Though it’s worth noting that the plan doesn’t even attempt to be revenue neutral: over ten years, there would be a static revenue loss of $3.4 trillion over ten years. Bush’s propoenents argue that under dynamic scoring, it would only lose 1/3 of that amount (which is still more than $1.1 trillion), but the dynamic scoring assumes a significant increase in growth over that time.