One of the most prominent U.S. economists is proposing that the fiscal cliff negotiators send a ‘sacred cow’ of the tax code, the mortgage interest deduction, to the slaughterhouse.
Dr. Peter Morici, professor at the Smith School of Business, University of Maryland School and former chief economist at the U.S. International Trade Commission, says that the deduction is no longer relevant.
‘The most sacred cow – the mortgage interest deduction – is simply not needed to support homeownership,’ Morici says. ‘Canada doesn't have it and enjoys similarly high rates of ownership. Both countries are land-intensive with more room to spread populations around major cities than Europe. Renting among the middle class is highest in North America, where land is most expensive, even though high incomes make the value of the mortgage interest deduction the greatest – for example, in New York City.’
Morici also argues that President's Obama plan to raise federal income taxes on Americans earning salaries of $250,000 or higher would not address the ongoing budget crisis.
‘Raising top rates would hit the wrong people,’ Morici continues. ‘In jurisdictions like New York and Maryland, adding in payroll, state and local income taxes, business property taxes and the like, marginal rates on many small businesses already approach 50 percent. Anyone who even casually studies economics knows taxing an activity reduces it. That's why progressives want a carbon tax to reduce fossil fuels use. Sadly, that reasoning applies to new investment too, and boosting marginal tax rates on small businesses above 50 percent will surely hurt expansion and jobs creation.’
However, Morici warns that the Republican leadership needs to become more serious on tax reform.
‘Taxes are way too low on financial engineering and many forms of compensation to the richest Americans," he says. ‘Capital gains rates of 15 percent on investments held for merely a year, as well as permitting many corporate executives and private equity engineers to pay similar rates on their pay, adds little to real investment or employment – more likely, it ships jobs overseas. Closing loopholes and adjusting capital gains to inflation by the length of time those are held would boost tax revenues and make the system fairer.’
