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The Center for American Progress, a liberal think tank, unveiled a tax reform plan (pdf) on Dec. 4 to raise $1.8 trillion in revenue. It tackles most of the big-ticket items, including raising top marginal income-tax rates (to a Clinton-era 39.6 percent), the top capital gains rate (to 28 percent), and treating carried interest and dividends as ordinary income (sorry, Mitt Romney).
It also addresses what may be thought of as the third-rail of tax reform—the cherished but costly mortgage-interest deduction—by eliminating it. Under the CAP plan, mortgage-interest would instead count toward an 18 percent tax credit, which would be phased in over time so as not to upset the fragile housing recovery.
The effect of this transformation from deduction to credit would be to shift the benefits down the income scale, away from the wealthy, who currently are the biggest beneficiaries of mortgage interest. Here’s how it would work, per an example cited in the plan:
Under the current tax code … if two families both deduct $10,000 in mortgage interest paid from their taxable income, their actual tax benefit could vary greatly. For a high-income family in the 35 percent tax bracket, that deduction would lower their tax bill by $3,500. For a middle-income family in the 15 percent bracket, that same $10,000 deduction results in only $1,500 in tax savings. Under our plan, since both families paid the same amount of mortgage interest, they would both receive the same $1,800 tax benefit.
But remember, the point of the CAP plan, along with making the tax code more progressive, is to raise revenue. According to the Congressional Research Service, the current mortgage interest deduction will cost about $100 billion in the 2014 fiscal year, making it the third-largest expenditure in the tax code. How does the CAP plan for mortgage interest compare? Good question. CAP doesn’t know. “We ran revenue estimates of our plan, but from the way the numbers were crunched it would be very difficult to isolate the effect of the [mortgage-interest deduction] given all the other moving parts,” says Seth Hanlon, CAP’s director of fiscal reform.
Even so, it’s worth paying attention to what CAP is proposing, since its politics and policy usually track pretty closely with those of the White House.