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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    Democrats like Pelosi would prefer to place more of the burden on wealthier Americans. That could mean paying smaller benefits to well-off retirees and subjecting more income to the Social Security payroll tax (currently levied on the first $106,800 of annual income — less in inflation-adjusted dollars than in the 1980s). But while top Republicans including incoming House Speaker John Boehner support raising the retirement age, their very political identity is built on opposition to higher taxes.

    The public doesn't offer much guidance. According to a September Gallup survey, 77% of Americans believe that programs such as Social Security and Medicare will cause major economic problems unless we take action soon. But when asked to choose between cutting benefits and raising taxes, the public splits, with more than a third of respondents saying, not very helpfully, that they oppose doing either.

    It's hard, then, to imagine a solution that the leaders of both parties can sign off on. But Social Security reform has happened before. When the program faced a funding crisis in 1983, President Ronald Reagan appointed Alan Greenspan to chair a commission that recommended a mix of tax hikes slanted toward wealthier workers and benefit cuts that included a slight bump in the retirement age. A liberal Democratic Congress approved the plan, and Reagan signed it into law. No electrocutions were reported.

    III. The 'American Dream' Subsidy

    Americans tend to hate the length of the U.S. tax code (17,000 pages), but they tend to love all the exemptions and loopholes — about $1.1 trillion in all — that apply to them. That includes everything from credits for having children to breaks for buying a Prius. But at about $130 billion per year, few breaks are as expensive — or as fiercely cherished — as the home-mortgage interest deduction.

    This granddaddy of tax preferences amounts to a massive government subsidy for homebuying: taxpayers can deduct the interest they pay on mortgages of up to $1 million. Originally born from a quirk dating to the tax code of 1894 that allowed all interest payments to be deducted, this one survived a tax-code purge in the 1980s and has gone unchallenged ever since. Never mind that economists grow hoarse arguing that taxes should treat economic activity neutrally and, thus, preferences like the mortgage deduction "distort private decisionmaking, create unfairness and reduce economic growth," as former Reagan White House adviser Bruce Bartlett has put it. Over decades, politicians in both parties have seen the subsidizing of mortgages as a fine opportunity to appear as champions of the middle class. "I want you to know that we will preserve the part of the American Dream which the home-mortgage interest deduction symbolizes," Reagan said in 1984.

    The subprime-mortgage disaster, however, showed that Americans could stand a bit less encouragement to take on six-figure debts for real estate. These days, it's hard to defend writing off the interest on a $1 million mortgage (which is probably not held by a struggling middle-class family) or getting a break on buying a new vacation house.

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