About two weeks ago President Reagan was in Texas, and while here he said we ought to consider abolishing the deductibility of home interest from our taxes. . . . That I believe is the worst single idea around in tax law. . . . That is the only deduction that is in the tax law at all that does any good at all for the average American.
Thus Walter Mondale in the Dallas candidates' debate May 2, using his signature rhetorical device of whiny hyperbole ("worst single idea...only deduction...any good at all") to exploit a recent Reagan gaffe. The dictionary meaning of "gaffe" is a social error or faux pas. The term probably entered politics courtesy of newspaper headline writers, who have a professional need for words of few letters. Of course "lie" has even fewer letters than "gaffe," but lies by politicians are not news. A "gaffe" is the opposite of a "lie": it's when a politician inadvertently tells the truth.
It doesn't take much to commit a gaffe. All that Reagan said, in answer to a question about the mortgage interest deduction, was:
I want them to look in the area of simplification at everything. Let's study everything that can be done. Now, would there be any harm if—and this is theoretical... But if we could have a lax simplification... and if that included such things as eliminating some things that today are deductibles, would that not resolve the problem, if we had an entirely different type of tax structure with a quite low rate?
Said Mondale the next day: "I've learned to expect at least one goofy proposal a week. . . . If you take that away, they ['the average working American'] are not going to be able to afford a home or housing, that's it." Of course demagoguery by politicians is also not news, but Mondale ought to reflect on a couple of things before he proceeds any further down this path.
First, whereas Reagan has only asked, in the most timid possible way, for a theoretical discussion of the subject, Mondale himself, whether he knows it or not, is on record in support of a severe cutback in the home mortgage interest deduction. Mondale has endorsed the Bradley-Gephart "Fair Tax" bill, the leading Democratic tax reform proposal. (Gary Hart supports it too.) Bradley-Gephart has tax rates from 14 percent to 30 percent. Though it retains a few traditional deductions, including home mortgage interest, these apply only against the 14 percent basic tax rate. The most anybody can deduct, in short, is fourteen cents on the dollar, which is far less than most mortgage holders deduct now.
Second, the home nmrtgage interest deduction is not, as Mondale portrays it, a little guy's tax break. Like many such government arrangements, it sprinkles enough benefits down into the middle class to create a political constituency, while reserving its most generous gifts for the affluent and ignoring the poor almost completely. Two-thirds of all taxpayers don't itemize their deductions, and therefore aren't even eligible for this goody. Sixty percent of homeowners—38 percent of homeowners with mortgages—don't take the deduction. Of those who do take it, higher-income people benefit most for the obvious reasons that they own more expensive homes (or even several homes) and are in higher tax brackets, where they save more per dollar deducted.
The mortgage interest deduction is expected to cost the Treasury about S23 billion this year, In the May 2 debate, Mondale defended it as a boon to people making less than $30,00(1 a year—his cutoff for "the little guy." But according to a 1981 Congressional Budget Office study, about three-quarters of the benefit from this deduction went to the one-fifth of all taxpayers making inert' than $30,000.
No matter who wins the fall election, there is going to be (or at least there had better be) a major effort at tax reform, with two goals in mind. The first goal is to simplify the system and reduce marginal rates. The more deductions that are eliminated or cut back, the lower tax rates can be. President Reagan was clearly right that we should "look . . . at everything," and it's shabby of Mondale to be scoring points off this minimally sensible remark (which Reagan's advisers have hastened to prevent him from amplifying).
Reagan himself has been disingenuous about the second goal, which is reducing the deficit. Obviously, tax reform won't raise much new revenue unless it is also a tax iiurease. Reagan, Mondale, and Hart all know this, but all avoid making it clear. Making it clear would be a gaffe. Nevertheless, the main reason tax "reform" suddenly has such momentum is that the pols realize is that the only way to sneak through the major tax increase we need.
In spirit, tying a tax increase to reform is a good idea. What bothers people about taxes is not the feeling that they're paying too much, but the feeling that they're getting gypped because the guy next door isn't paying his share. Addressing this resentment would make a tax increase easier to swallow. But it is fairly breathtaking to read Charls E. Walker, quoted in the April 16 Newsweek on the subject of tax reform, saying, "The system we've got is lousy."
Charls Walker is more responsible than any single person, including Ronald Reagan, for our present fiscal dilemma. He is the business lobbyist who engineered the various tax breaks for corporations and rich people that were enacted in 1978 and 1981. Having bled the Treasury dry with these schemes, he is now shocked—shocked!—to discover that the government is running a huge deficit. Walker is in the midst of a nationwide campaign to build support for what he is calling a "tax on business transactions." Cleverly named, this is actually a national sales tax, the most regressive kind of tax. Walker would use it to reduce the deficit and gradually replace the current income tax. That's his idea of reform.
Reagan and conservatives in Congress have other tax reform ideas. What they all have in common is that, having cut taxes on capital, they now want to make up the difference by raising taxes on labor. If the leader of the Democratic Party makes it politically impossible to take on any of the major boondoggles in the present system, (he ways other politicians will find to raise the necessary revenues will be a lot worse.