Blog For Arizona

Flattening the Middle Class

John Edwards and others in the Democratic party have scented a plan to move toward a flat tax coming from the depths of the White House. If Bush should be re-elected a centerpiece of the Bush agenda would be a series of tax reforms to move toward such a flat tax.

And what is wrong with a flat tax, you might ask? Nothing. If you don’t mind losing the progressivity of the current graduated income tax. If you don’t feel that those who get more of societies rewards should pay a higher share of the cost of running society. If you don’t mind burdening the middle class with even more of the nation’s tax obligations. That is exactly what conservative policy wonks hoping to benefit their most affluent constituents have been dreaming of for decades. With Bush, they may finally get to implement their fondest desires.

The first substantial step toward a flat tax by Bush in a second term is likely to be the elimination of the home mortgage deduction. Conservatives argue that elimination of this deduction under a flat tax with a single large consumption exemption would not result in higher taxes because the standards exemption would be so much larger. Regardless of the merit of those assertions, elimination of the deduction without revamping the tax code appreciably, would have disastrous consequences for the American middle class.

First, would be the immediate loss of several thousands of dollars of deductions for the average middle class family and a higher tax bill. A rough estimate is about 50 billion a year in additional taxes on taxpayers, most of it from middle income families. The second, and most pernicious effect is the impact on real estate values. Real estate industry associations have estimated that residential real estate would fall in value by 10 -15%. Since the average family’s home represents a very large portion of their total savings, the average family would not only pay higher taxes, but have their most significant asset's value hammered. The equity in people’s homes finances much of American families most significant expenditures: college tuition, down payments on first homes for children, financing small businesses, and similar investments in families’ and America’s futures. Bush would destroy the very assets which are building a better life for so many.

The American dream is often held to include the dream of home ownership, one reason we incentivize it with the mortgage interest deduction in the first place. The elimination of the deduction will perversely make it more difficult for people to qualify for home loans. The interest deduction in effect raised people’s useable income for calculating loan qualifications. Part of the 10-15% loss in real estate value is due to this effect; fewer people would qualify to mortgage any particular home, lowering demand, and thus reducing market value. The other obvious effect is less people, especially those who qualify only marginally now due to their lower income, will be permanently shut out of the American dream of home ownership.

The Bush Administration clearly understands the impact the flat tax and home morgage deduction elimination would have on home owners and the middle class. Note how artfully John Snow dodged this very question a few days ago:

Jim, from The Bronx, NY writes:

Does the administration support flat tax proposals and has there been any analysis of such proposals' impact on homeownership? Thanks for your attention.

John Snow:

Thanks for your interesting question, Jim. There is a lot of interest, all across this country, in changing our tax code.

President Bush believes that America's taxpayers deserve, and our future economic prosperity demands, a simpler, fairer, pro-growth tax code - and he has pledged to lead a bipartisan effort to reform and simplify it.

The President also understands how important homeownership is to this country, and I am pleased to report that homeownership levels have reached record highs during his administration.

President Bush has a bold agenda for promoting an ownership society by giving young people the option of voluntary personal accounts under Social Security to give them more control over their retirement savings, encouraging Americans to utilize Health Savings Accounts that give individuals expanded access and choice in health care, ensuring lower taxes and less burdensome regulations for entrepreneurs, and promoting policies that eliminate barriers to homeownership.

Snow is a flat tax fan, too. He knows what the effect on the middle class would be. During the mid-1990's, John Snow served on the National Commission on Economic Growth and Tax Reform, a 13 member GOP tax simplification panel that was chaired by Jack Kemp and created by Sen. Bob Dole (R-KS) and Rep. Newt Gingrich (R-GA).

To recap: higher taxes for the middle class, a body blow to existing home values, destruction of middle class assets and investments, and closing the American dream to whole segment of society versus helping Bush recover some revenue to offset tax cuts benefiting mainly the wealthiest Americans and setting us on a path to an even less fair tax system in the future. Sounds like a great deal, right?

posted by Michael Bryan @ 9/22/2004 05:41:00 PM