Any tax reform that lowers the top rate and scraps deductions should be rejected

[Sbane]

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

This is true. My parents just sold their home in the Bay Area, and thus now will start getting hit by higher taxes since they can't deduct that from their income. Now they are thinking of buying a condo and renting it out to lower the amount of income subject to a tax. Wouldn't it be great if deductions were capped at a lower amount so they wouldn't have an incentive to do that and if tax rates were lowered on their income up to say 150-200k (I think the rates above that should remain the same even with a deduction cap. The rich do need to be soaked a little more.)?

[Sbane]

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

This is true. My parents just sold their home in the Bay Area, and thus now will start getting hit by higher taxes since they can't deduct that from their income. Now they are thinking of buying a condo and renting it out to lower the amount of income subject to a tax. Wouldn't it be great if deductions were capped at a lower amount so they wouldn't have an incentive to do that and if tax rates were lowered on their income up to say 150-200k (I think the rates above that should remain the same even with a deduction cap. The rich do need to be soaked a little more.)?

The economically "efficient" rule would be to allow mortgage interest deductions without a cap on your personal residence, but offset that deduction with the imputed value of your home as a rental, since you are basically renting the house to yourself as both the landlord and the tenant, but the rental "income" is not taxed. I say this because if you have the cash, and mortgage interest is not deductible on your home, then you have an incentive to not have the mortgage, and pay all cash, because otherwise that cash will be generating taxable income, while the mortgage that allows you to have that cash, involves the payment of interest that you cannot deduct. The cost of money should be deductible always.  The same is true really for any such debt, including say credit card interest, which involves the same principle, although at a 20% interest rate, that is a bit rich, so only the interest cost should be deductible which represents the cost of close to a risk free loan, not a risky one, or one charging a predatory interest rate. Are you following all of this?

I oppose all deductions for state and local income taxes. That is just a subsidy to the localities from the Feds (and again favors high tax bracket taxpayers). Such subsidies should again be means tested, not across the board. In other words, Mississippi gets money, but Connecticut does not.  So the property taxes on your home that is not rented out generating taxable rental income should not be deductible.

Make sense?  Of course, most of this will never happen. 

Why do you think interest should always be deductible? And in any case wouldn't your idea lead to no lowering of tax liability in most cases. I think the vast, vast majority of people pay less interest on their mortgage than they could get back in rental income on that property. And if you allow deducting interest you have to pay to the bank, why not allow the "interest" you must pay the state to live on your piece of land (aka property taxes)?

Also what are your thoughts about California? Should it also not get money? I think many people in California, especially in Southern California, considering their income and the cost of living here need help. Connecticut, probably not. Perhaps not the Bay Area either, but costs there are even higher than Southern California.

[Sbane]

I was discussing tax policy vis a vis economic efficiency. One can argue for public policy reasons for some inefficiency, although, no, most people probably pay more in mortgage interest than they could earn renting the house out after expenses  but prior to interest carry costs.

I thought you meant deducting the entire rental income from the mortgage interest paid. Of course if you meant what the person gains after paying the interest on the mortgage, property tax and other expenditures, that is a different matter.