Flat tax and mortgage deduction
by
Matt Giwer (c) 1996 <1/27>

      In my last article on the flat tax I said we should not be debating the merits of any particular proposal. Let me use the mortgage deduction as an example and see what principles can be illustrated. The conclusion you will see is that the difference is something like fifty dollars a year.
      For this purpose I am going to make up some basic numbers for talking purposes. The correct numbers depend upon the needed federal revenues and the total value of mortgage interest that would be deducted. Exact numbers are not important here as I want to show trends, "what happens if" kind of things.
      For purposes of discussion the mythical family pays no taxes on the first $35,000 of income. The tax rate is 20% of income above $35,000. Deductable mortgage interest is $5,000. These are sort of in the range of all of the plans being discussed.
      Given we are talking about a balanced budget then a fixed revenue is needed. That means if only the first $30,000 are excluded from taxation then the tax rate will be lower, and if the excluded amount is higher then the rate is higher. All else being equal the excluded amount determined the rate or vice versa. They can not be changed independently.
      Holding the $35,000 fixed without the mortgage deduction the rate remains at 20%. If there is a mortgage deduction then the excluded income increases to $40,000 and the tax rate will have to increase. So in both cases if one goes up the other goes up and if one goes down the other goes down.
      While there are always those who "care" on principle what matters is who will have anything to care about in dollars. First off, those families with incomes of $35,000 or less will pay no taxes whether or not there is a mortgage deduction. Those people have no reason to care in terms of dollars.
      If there is a deduction and the family has a $40,000 income and they have the $5000 in mortgage interest then they care in terms of dollars. And all families making over $40,000 care about exactly the same number of dollars. If, because of this deduction the tax rate goes up to 21% then they all care about is the difference between 20% of $5000 and 21% of $5000 or $50.
      The income level that has dollars to care about the mortgage deduction would only be those between $35,000 and $40,000 that would see the difference and that would be roughly $10 per $1000 dollars of income over $35,000 up to the maximum at $40,000.
      This is an example of why I said we should not be debating a particular flat tax at this time. If you have been paying attention people defending the mortgage deduction have predicted everything from the end of the American dream of home ownership (a principle) to the collapse of the home construction and mortgage industry (a dollar value.) But as you can see from even this modest example such dire predictions are incredible when talking about at most fifty dollars a year for people at these income levels.