Can Washington Tackle Its Sacred Deficit Cows?

As Washington argues about how to rein in a national debt headed for a crippling $20 trillion, here are three places to start. It won't be easy

By Michael Crowley Sunday, Dec. 19, 2010
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    Bowles and Simpson have proposed capping the deduction at $500,000 and disallowing it for that beach house. Yet even such a modest change — phased in over time to protect housing prices — would provoke a hurricane of opposition. Some would come from the public: nearly 80% of respondents supported the deduction in a recent poll sponsored by the homebuilding industry. Then there's the power of the National Association of Realtors (NAR), which spent more than $20 million lobbying Congress last year and pumped $11 million into the 2010 elections. Mere talk of changing the interest deduction has the NAR springing into action, warning of a 15% drop in home prices (unlikely for a phased-in plan) and claiming that a home-sales "chilling effect" is already under way. In a letter to Simpson and Bowles, the NAR rhapsodized, "The cottage with a picket fence is an iconic part of our heritage. Do not take that imagery or that passion lightly."

    Nobody does. Which is why the only realistic way to prevent a mass revolt over scaling back the deduction would be to incorporate it into a sweeping revamp of the tax code. "What needs to be done is fundamental tax reform," says Curtis Dubay, a tax expert at the conservative Heritage Foundation. That's one idea Bowles and Simpson offer: wiping out all special tax preferences and, in return, lowering personal income-tax rates to as low as 8%.

    Ripping up those 17,000 pages of tax code may sound ridiculously ambitious. But it's actually been done before. In 1986 Congress hammered out a sweeping tax reform that closed $300 billion in loopholes and lowered rates across the board. Under such a reform, "the market will allocate resources and not the special interests that influence the political process," says former New Jersey Senator Bill Bradley, who led the 1986 tax overhaul. "It's not easy but still possible."

    Yes, it is. Washington may seem sclerotic now, but so did it in the spring of 1986.

    This article originally appeared in the Dec. 13, 2010 issue of TIME.

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