The accidental deduction: A history and critique of the tax subsidy for mortgage interest

Law and Contemporary Problems

Volumn 73, Issue 1, 2010, Pages 233-284

  Ventry Jr , Dennis J ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 78149256381     PISSN: 00239186     EISSN: None     Source Type: Journal    
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References (351)

1. Pub. L. No. 99-514, 100 Stat. 2085 (1986) [hereinafter TRA86].
2. See infra notes 357-62 and accompanying text (discussing the effects of TRA86 on housing tax subsidies)
3. The NAR attacked members of Congress in their home districts for lukewarm support of the MID.
4. See Pat Jones, Housing Industry Lobbying Campaign Rankles Some Taxwriters, 42 TAX NOTES 409, 409-10 (1989).
5. The National Association of Home Builders adopted a slightly less aggressive strategy, but also mobilized "to fight hard for the retention of the mortgage deduction." Id. at 409 (quoting the Association's president).
6. U.S. CENSUS BUREAU, HISTORICAL TABLES-FAMILIES, TABLE F-1, INCOME LIMITS FOR EACH FIFTH AND TOP 5 PERCENT OF FAMILIES: 1947-2007 (2008), available at http://www.census.gov/hhes/www/income/histinc/f01AR.html.
7. See James R. Follain & David C. Ling, The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction, 44 NAT'L TAX J. 147, 154 (1991) (citing the $42,500 figure).
8. James Poterba, Taxation and Housing: Old Questions, New Answers, 82 AM. ECON. REV. 237, 238-40 (1992) (finding similar results).
9. See James Poterba, Tax Subsidies to Owner-Occupied Housing: An Asset Market Approach, 99 Q.J. ECON. 729, 748-49 (1984).
10. Patric Hendershott & Joel Slemrod, Taxes and the User Cost of Capital for Owner-Occupied Housing, 10 AREUEA J. 375, 375-76 (1983).
11. See Dale Jorgenson & Kun-Young Yun, Tax Reform and U.S. Economic Growth, 98 J. POL. ECON. 151, 190 (1988) (finding that housing tax subsidies account for half of all distortions from misallocated capital in the economy).
12. Edwin S. Mills, Has the United States Overinvested in Housing?, 15 J. AM. REAL EST. & URB. ECON. ASS'N 601, 601 (1987) (estimating that the housing stock is 33% higher than the efficient allocation).
13. See Harvey S. Rosen, Housing Subsidies: Effects on Housing Decisions, Efficiency, and Equity, in 1 HANDBOOK OF PUBLIC ECONOMICS, 375, 395-402 (Alan J. Auerbach & Martin Feldstein eds., 1985) (discussing earlier research on elasticities of housing demand and supply).
14. See Alan L. Feld, Redeployment of Tax Expenditures for Housing, 23 TAX NOTES 1441, 1443 (1984) (reporting that tax benefits for housing "flow disproportionately" to high-income taxpayers because they are tied to marginal tax rates, rise with increased housing consumption, and are unavailable to nonitemizers).
15. Harvey S. Rosen, Housing Decisions and the U.S. Income Tax: An Econometric Analysis, 11 J. PUB. ECON. 1, 21-22 (1979) (finding that eliminating tax subsidies for homeownership would reduce income inequality).
16. See Steven V. Roberts, Opposition to Carter on Economic Affairs Reaches 54 Percent in Poll, N.Y. TIMES, Apr. 12, 1978, at A17 (reporting on a 1978 New York Times-CBS News poll that found nearly 90% of respondents favored preserving the deductions for mortgage interest and property taxes).
17. See IRS, SOI BULLETIN, HISTORICAL TABLE 7: STANDARD, ITEMIZED, AND TOTAL DEDUCTIONS REPORTED ON INDIVIDUAL INCOME TAX RETURNS, 1950-2006 (2008), available at http://www.irs.gov/taxstats/article/0,id=175812,00.html [hereinafter INDIVIDUAL DEDUCTIONS] (showing only 28.5% of all income tax returns reported itemized deductions for tax year 1989).
18. JEFFREY H. BIRNBAUM & ALAN S. MURRAY, SHOWDOWN AT GUCCI GULCH: LAWMAKERS, LOBBYISTS, AND THE UNLIKELY TRIUMPH OF TAX REFORM 246 (1987).
19. Bruce Bartlett, Tax Reform's "Third Rail": Mortgage Interest, 139 NCPR POL'Y BACKGROUNDER 1 (1996).
20. CHRISTOPHER HOWARD, THE HIDDEN WELFARE STATE: TAX EXPENDITURES AND SOCIAL POLICY IN THE UNITED STATES 93 (1997)
21. Howard identifies Social Security and Medicare as the other two members of the "trinity."
22. Lou Cannon, Reagan to Keep Home Mortgage Tax Deduction, WASH. POST, May 11, 1984, at F1.
23. Reagan's announcement, delivered personally to the National Association of Realtors, exasperated tax experts even within his own administration
24. See infra notes 323-30 and accompanying text
25. JOINT COMMITTEE ON TAXATION, ESTIMATES OF FEDERAL TAX EXPENDITURES FOR FISCAL YEARS, 1986-1990, at 13 (1985)
26. U.S. OFFICE OF MGMT. & BUDGET, ANALYTICAL PERSPECTIVES: BUDGET OF THE U.S. GOVERNMENT, FISCAL YEAR 2010, at 300 (2009) [hereinafter O.M.B. Report [year]]; O.M.B. Report 1996, at 43 (reporting cost of $57 billion).
27. Id. for FISCAL YEARS 1996-2010 (for 1996, id. at 64; 1997, at 86; 1998, at 79; 1999, at 99; 2000, at 114; 2001, at 117; 2002, at 63; 2003, at 107; 2004, at 110; 2005, at 294; 2006, at 324; 2007, at 296; 2008, at 296; 2009, at 298; 2010, at 308).
28. (corresponding to years 2003-2010). The MID is not the only tax expenditure item related to housing. In 2010, tax expenditures related to housing will cost the federal government $175 billion. In addition to the MID, other items include the exclusion for gains on home sales ($30.46 billion), the deduction for state and local property taxes ($14.98 billion), the accelerated depreciation on rental housing ($10.77 billion), the exception from passive loss rules for rental loss ($9.16 billion), the credit for low-income housing investments ($4.34 billion), the deferral from income of installment sales ($1.37 billion), the exclusion of interest on mortgage subsidy bonds ($1.03 billion), the exclusion of interest on rental housing bonds ($0.93 billion), and the discharge of mortgage indebtedness ($0.26 billion).
29. The $175-billion figure would be even higher but for the recent precipitous drop in the value of the exclusion for net imputed rental income, which, according to the OMB, will fall from $35.68 billion in 2008 to negative $2.2 billion in 2010.
30. The explanation for the dramatic decline is simple: growth in owner-occupied housing expenses has outpaced growth in gross rental value of owner-occupied housing. I thank David Joulfaian of the Department of Treasury's Office of Tax Analysis and Denise McBride of the Department of Commerce's Bureau of Economic Analysis for this information.
31. For a definition of imputed rent, see infra note 30
32. See I.R.C § 163(h)(3) (1986).
33. Revenue Act of 1913, Pub. L. No. 63-16, 38 Stat. 114, 167.
34. "Imputed rent" corresponds to the sum of the market value of untaxed housing services enjoyed by homeowners. If homeowners were treated like investors of other asset classes, they would include as taxable income the value of net imputed rent, reflecting the rent a homeowner would have received had she leased the property to someone else less the cost of generating that income (such as mortgage interest payments, property and real estate taxes, economic depreciation, and maintenance expenditures).
35. Stanley A. Koppelman, Personal Deductions Under an Ideal Income Tax, 43 TAX L. REV. 679, 713 (1987).
36. See also infra notes 51-58 and accompanying text
37. Revenue Act of 1913, 38 Stat. at 167.
38. STANLEY S. SURREY, PATHWAYS TO TAX REFORM: THE CONCEPT OF TAX EXPENDITURES 127 (1973).
39. Surrey included in this group the deductions for property taxes, other state and local taxes, and depreciation, the last of which he termed "inadvertent" and said was created by "happenstance."
40. U.S. CENSUS BUREAU, HOUSING VACANCIES AND HOMEOWNERSHIP (CPS-HVS), HISTORICAL TABLES, TABLE 7: ANNUAL ESTIMATES OF THE HOUSING INVENTORY (2009), available at http://www.census.gov/hhes/www/housing/hvs/historic/index.html.
41. U.S. CENSUS BUREAU, PRESS RELEASE, REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP 3 (2009).
42. BUREAU OF THE CENSUS, HISTORICAL STATISTICS OF THE UNITED STATES, COLONIAL TIMES TO 1970, at 646 (1975), available at http://www2.census.gov/prod2/statcomp/documents/CT1970p1-01.pdf. Between 1890 and 1930, the U.S. Census reported homeownership rates of 47.8% in 1890, 46.7% in 1900, 45.9% in 1910, 45.6% in 1920, and 47.8% in 1930. Id.
43. U.S. CENSUS BUREAU, STATISTICAL ABSTRACT OF THE UNITED STATES: 1999, at 727 (118th ed. 1999), available at http://www.census.gov/prod/99pubs/99statab/sec25.pdf.
44. For the ratification movement, see W. ELLIOT BROWNLEE, FEDERAL TAXATION IN AMERICA: A SHORT HISTORY 36-46 (1996)
45. JOHN D. BUENKER, THE INCOME TAX AND THE PROGRESSIVE ERA (1985).
46. SIDNEY RATNER, AMERICAN TAXATION: ITS HISTORY AS A SOCIAL FORCE IN DEMOCRACY 250-340 (1942)
47. Revenue Act of 1913, Pub. L. No. 63-16, 38 Stat. 114. "Normal" income tax rates were assessed on taxable income above the exemption levels and below $20,000, while graduated "surtax" rates were assessed on taxable income above $20,000.
48. See 1 CORDELL HULL, THE MEMOIRS OF CORDELL HULL 71 (1948) (primary author of the 1913 Revenue Act calling the income tax "the one great equalizer of the tax burden and therefore a tremendous agency for the improvement of social conditions")
49. Roy G. Blakey, The New Income Tax, 4 AM. ECON. REV. 25, 33 (1914) (considering progressive taxation a symbol of economic and social justice).
50. Ajay K. Mehrotra, Envisioning the Modern American Fiscal State: Progressive Era Political Economists and the Intellectual Foundations of the U.S. Income Tax, 52 UCLA L. REV. 1793 (2005) (exploring legal and economic arguments for redistributive, ability to pay taxation).
51. Edwin R.A. Seligman, The Income Tax, 9 POL. SCI. Q. 610, 648 (1894) (calling for a federal income tax to "round out the existing tax system in the direction of greater justice").
52. The top marginal rate of 7% began at $500,000, unadjusted
53. W. Elliot Brownlee, Historical Perspective on U.S. Tax Policy Toward the Rich, in DOES ATLAS SHRUG?: THE ECONOMIC CONSEQUENCES OF TAXING THE RICH 29, 41-42 (Joel B. Slemrod ed., 2000).
54. Scott Hollenbeck & Maureen Keenan Kahr, Ninety Years of Individual Income and Tax Statistics, 1916-2005, in IRS STATISTICS OF INCOME BULLETIN 144 (Winter 2008), available at http://www.irs.gov/pub/irs-soi/16-05intax.pdf.
55. See W. Elliot Brownlee, Wilson and Financing the Modern State: The Revenue Act of 1916, PROC. AM. PHIL. SOC'Y 129, 173-210 (1985).
56. By war's end, individual income tax rates ranged between 12% and 77%, and estate tax rates reached 25%. Revenue Act of 1918, Pub. L. No. 65-254, 40 Stat. 1057, 1062.
57. The other seven deductions included offsets for (1) business expenses, (2) state and local taxes, (3) losses (both capital and casualty), (4) bad debts, (5) depreciation and depletion of business property, (6) dividends received, and (7) tax paid or withheld
58. See Revenue Act of 1916, Pub. L. No. 64-271, 39 Stat. 756, 759; Revenue Act of 1918, Pub. L. No. 65-254, 40 Stat. 1057, 1067-68; Revenue Act of 1921, Pub. L. No. 67-98, 42 Stat. 227, 239; Revenue Act of 1924, Pub. L. No. 68-176, 43 Stat. 253, 270; Revenue Act of 1926, Pub. L. No. 69-20, 44 Stat. 9, 26; Revenue Act of 1928, Pub. L. No. 70-562, 45 Stat. 791, 799; Revenue Act of 1932, Pub. L. No. 72-154, 47 Stat. 169, 179; Revenue Act of 1934, Pub. L. No. 73-216, 48 Stat. 680, 688; Revenue Act of 1935, Pub. L. No. 74-407, 49 Stat. 1014; Revenue Act of 1936, Pub. L. No. 74-740, 49 Stat. 1648, 1659; Revenue Act of 1940, Pub. L. No. 76-656, 54 Stat. 516; Revenue Act of 1941, Pub. L. No. 77-250, 55 Stat. 687; Revenue Act of 1942, Pub. L. No. 77-753, 56 Stat. 798; Revenue Act of 1943, Pub. L. No. 78-235, 58 Stat. 21; Individual Income Tax Act of 1944, Pub. L. No. 78-315, 58 Stat. 231; Revenue Act of 1945, Pub. L. No. 79-214, 59 Stat. 556; Revenue Act of 1948, Pub. L. No. 80-471, 62 Stat. 110; Revenue Act of 1950, Pub. L. No. 81-814, 64 Stat. 906; Revenue Act of 1951, Pub. L. No. 82-183, 65 Stat. 452; Internal Revenue Code of 1954, Pub. L. 83-591, 68A Stat. I, 46; Revenue Act of 1962, Pub. L. No. 87-834, 76 Stat. 960; Revenue Act of 1964, Pub. L. No. 88-272, 78 Stat. 19; Revenue and Expenditure Control Act of 1968, Pub. L. No. 90-364, 82 Stat. 251; Tax Reform Act of 1969, Pub. L. No. 91-172, 83 Stat. 487; Revenue Act of 1971, Pub. L. No. 92-178, 85 Stat. 497; Tax Reduction Act of 1975, Pub. L. No. 94-12, 89 Stat. 26; Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520; Tax Reduction and Simplification Act of 1977, Pub. L. No. 95-30, 91 Stat. 126; Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. 2763; Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172; Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324; Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494.
59. The only discussion I found reflecting legislators' awareness in 1913 that taxpayers might deduct mortgage interest under the proposed consumer interest deduction involved an excerpt from debate on the Senate floor: If I understand [the deduction for consumer interest], it would result in this sort of a situation: Here is one man, for example, who has purchased a home. He has given a mortgage upon it for its price or a large part of it, and is paying, let us say, $1,000 in interest.
60. Under this bill that would be deducted from his net income. But if his neighbor has rented a house, and instead of virtually paying what the first-named man does in the form of interest he pays directly $1,000 rent. He gets no deduction whatever, and yet the situation of the two is to all intents and purposes precisely the same. One has made a purchase and is paying interest which virtually amounts to rent. The other has not made a purchase, but pays the rent direct. One gets the exemption and the other does not.
61. CONG. REC. 3848 (1913) (statement of Sen. Sutherland).
62. C. HARRY KAHN, PERSONAL DEDUCTIONS IN THE FEDERAL INCOME TAX 12-13 (1960) (calling the "lack of distinction between personal expenses on the one hand and business expenses and losses on the other" the "primary reason" legislators provided a deduction for personal interest in 1913).
63. Stanley S. Surrey, The Federal Income Tax Base for Individuals, 58 COLUM. L. REV. 815, 825 (1958) (surmising that the deduction was included "because it was thought difficult to separate personal interest from business interest").
64. At least one member of Congress recognized that the deduction for consumer interest violated the principle of a net income tax that taxpayers should be allowed offsets only for items that generate taxable income: This whole paragraph [involving the proposed deduction for consumer interest] is framed upon the idea that the capital of the individual must be protected intact, must be preserved; that he can use any part of the income he likes for the repair of the capital with which he entered the year and have it deducted from the income
65. The principle is wrong. It ought not be in any income tax law. It is not a part of the purpose of an income tax law to guarantee that the capital shall be maintained. If the capital is lost, there will be a diminished income the following year upon which to levy the tax; but the taxable income should not be depleted by withdrawing from it a sum sufficient to maintain the capital, unless the income arose out of a business in which the capital was employed.
66. CONG. REC. 3846 (1913) (statement of Sen. Cummins).
67. See, e.g., Roger Lowenstein, Who Needs the Home Mortgage-Interest Deduction?, N.Y. TIMES, Mar. 5, 2006, Magazine, at 79 ("It was not until the 1920s and the spread of the automobile that home mortgages outnumbered farm mortgages.").
68. For nonfarm mortgages, see BUREAU OF THE CENSUS
69. For farm mortgages, see L.M. Graves, Interest and Taxes in Relation to Farm Income, 117 ANNALS AM. ACAD. POL. & SOC. SCI. 35, 35 (1925).
70. BUREAU OF THE CENSUS
71. For farm mortgages, see U.S. CENSUS BUREAU, SPECIAL REPORTS, FARM MORTGAGE DEBT: COOPERATIVE REPORT 12 (1952).
72. These numbers tell the story of a stagnant farm population and a rapidly increasing nonfarm population: between 1910 and 1930, the number of owner-occupied farms shrank from just under 3.84 million to 3.45 million while the number of owner-occupied nonfarm residences doubled from 5.25 million to 10.55 million.
73. In 1913, taxpayers filed 358,000 returns at a time when there were 5.25 million homeowners and 1.7 million mortgaged homeowners. In 1920, with the personal exemption still at a wartime low, 7.26 million returns were filed for a population including 7.04 million homeowners and 2.7 million mortgaged homeowners. In 1930, returns barely topped 3.7 million at a time when over 4.7 million out of 10.56 million homeowners carried a mortgage.
74. Between 1920 and 1931, the number of annual income tax returns plummeted from 7.26 million to 3.23 million, while income tax receipts dropped from $1.08 billion to $246 million.
75. See Revenue Act of 1921, 42 Stat. at 232-37 (lowering top marginal rate to 58% and providing favored rates for capital gains).
76. Revenue Act of 1924, 43 Stat. at 262-64, 272 (raising exemptions and lowering the top rate to 46%); Revenue Act of 1926, 44 Stat. at 21-23 (lowering top rate to 25%).
77. In fact, it was not until 1942 that the average annual earnings of nonfarm workers exceeded the tax-free threshold, a milestone that was due as much to the falling exemption (which had been lowered to $1200) as to elevated incomes. Id.
78. Ernest M. Fisher, Changing Institutional Patterns of Mortgage Lending, 5 J. FIN. 307, 307 (1950).
79. see also Charles E. Persons, Credit Expansion, 1920 to 1929, and Its Lessons, 45 Q.J. ECON. 94, 96-100 (1930) (describing the role of mortgage debt in the massive expansion of credit in the 1920s).
80. Richard K. Green & Susan M. Wachter, The American Mortgage in Historical and International Context, 19 J. ECON. PERSP. 93, 94 (2005).
81. See WILLIAM W. BARTLETT, MORTGAGE-BACKED SECURITIES: PRODUCTS, ANALYSIS, TRADING 5-6 (1989).
82. Albert Monroe, How the Federal Housing Administration Affects Homeownership 30-32 (Harvard Joint Ctr. for Hous. Studies, Working Paper No. 02-4, 2001), available at http://www.jchs.harvard.edu/publications/governmentprograms/monroe_w02-4.pdf
83. Not all home mortgages were short-term, nonamortizing loans prior to the 1930s. Savings and loan associations (or "building and loan" associations, as they were called) accounted for about 50% of the mortgage market and offered qualifying borrowers fully amortized loans with terms as long as fifteen years.
84. Michael S. Carliner, Development of Federal Homeownership "Policy," 9 HOUSING POL'Y DEBATE 299, 304 (1998).
85. see also Robert E. Lloyd, Government-Induced Market Failure: A Note on the Origins of FHA Mortgage Insurance, 8 CRIT. REV. 61, 62 (1994).
86. See W. ELLIOT BROWNLEE, DYNAMICS OF ASCENT: A HISTORY OF THE AMERICAN ECONOMY 409 (1988).
87. LEO GREBLER, DAVID M. BLANK & LOUIS WINNICK, CAPITAL FORMATION IN RESIDENTIAL REAL ESTATE: TRENDS AND PROSPECTS 467 (1956).
88. The calamitous trend for farmers was already underway in the 1920s
89. See, e.g., L.C. Gray, The Trend in Farm Ownership, 142 ANNALS AM. ACAD. POL. & SOC. SCI. 20, 25 (1929).
90. See, e.g., E.C. Young, The Farm Mortgage Credit Situation in the United States, 17 J. FARM ECON. 260, 261 (1935) (discussing farmers' short credit, limited provisions for debt retirement, and inability to refinance).
91. See Donald C. Horton & E. Fenton Shepard, Federal Aid to Agriculture Since World War I, 19 AGRIC. HIST. 114, 116 (1945).
92. Morton Bodfish, Government and Private Mortgage Loans on Real Estate, 11 J. LAND & PUB. UTIL. ECON. 402, 402 (1935).
93. J.K. Galbraith et al., Farm Mortgage Loan Repayment: A Survey of Existing Plans and Some Possible Alternatives, 19 J. FARM ECON. 764, 764 (1937).
94. See F.F. Hill, Flexible Payment Plans for Farm Mortgage Loans, 20 J. FARM ECON. 257 (1938) (discussing some of these innovations in the farm context).
95. Pub. L. No. 73-10, 48 Stat. 31 (1933).
96. Pub. L. No. 73-75, 48 Stat. 257 (1933).
97. President Herbert Hoover's Administration was also active in combating the unstable housing market, establishing the Federal Home Loan Bank Board (which chartered and supervised savings and loans, and established the Federal Home Loan Banks that extended credit to S&Ls) and the Reconstruction Finance Corporation (RFC) (which provided emergency funds for ailing financial institutions)
98. But these agencies were modeled largely on past experiments in emergency aid
99. Sundry other agencies played a less direct role in the reformulation of U.S. housing markets and policy. The Federal Deposit Insurance Corporation (FDIC), created in 1933, shored up depositor and investor confidence in the nation's banking system by providing deposit insurance to member banks.
100. The Federal Savings and Loan Insurance Corporation, enacted in 1934 as part of the National Housing Act, insured deposits of federally chartered savings and loans, much like its counterpart, the FDIC, which insured deposits in commercial banks
101. Even the iconic Public Works Administration contributed to the effort through its Housing Division, which built and operated urban and low-income housing projects
102. (writing that the HOLC's use of "the fixed-rate, self-amortizing, long-term mortgage was, above all else, a response to a general financial crisis, as opposed to a design for the promotion of homeownership per se")
103. See U.S. DEPT. OF HOUSING AND URBAN DEV., ABOUT HOUSING (Mar. 26, 2009), available at http://www.hud.gov/offices/hsg/hsgabout.cfm.
104. See U.S. DEPT. OF HOUSING AND URBAN DEV., THE FEDERAL HOUSING ADMINISTRATION (Sept. 6, 2006), available at http://www.hud.gov/offices/hsg/fhahistory.cfm.
105. Observers at the time considered the FHA's used of long-term, fixed-rate, amortized mortgages "[p]robably the most important general effect" of its involvement in the mortgage market
106. Arthur M. Weimer, The Work of the Federal Housing Administration, 45 J. POL. ECON. 466, 476 (1937).
107. See id. at 646; see also id. at 651 (reporting that the number of owner-occupied residences rose from 11.4 million to 19.8 million during the 1940s).
108. The figure continued on an upward trajectory, climbing to $250 billion by 1965 and $340 billion by 1970
109. See CHARLES M. HAAR, FEDERAL CREDITS AND PRIVATE HOUSING 34 (1960) (explaining the "extraordinary growth in homeownership" in postwar America as primarily due to "the national housing credit programs that have translated the wish [for homeownership] into a financial possibility").
110. Pub. L. No. 78-346, 58 Stat. 284.
111. See also Fisher, supra note 71, at 313 (reporting that between 40% and 45% of total mortgage indebtedness by 1960 was "protected by some form of government insurance or guaranty")
112. See KAHN, supra note 56, at 110 (attributing sharp increase in the value of interest deductions to "itemized personal interest expenditures... largely... of homeowners with mortgages, who tend to have sizeable outlays for interest").
113. The personal interest deduction was recodified multiple times and redesignated permanently as § 163 in 1954
114. See Carolyn Jones, Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax During World War II, 37 BUFF. L. REV. 685, 686 (1988).
115. Between 1940 and 1945, the personal exemption fell from $1000 for singles and $2500 for married couples to, respectively, $500 and $1000
116. See Revenue Act of 1940, Pub. L. No. 76-656, 54 Stat. 516 (lowering personal exemptions for singles from $1000 to $800 and for married couples from $2500 to $2000); Revenue Act of 1941, Pub. L. No. 77-250, 55 Stat. 687 (lowering exemptions for singles to $750, for married couples to $1500).
117. Revenue Act of 1942, Pub. L. No. 77-753, 56 Stat. 798 (lowering exemptions for singles to $500, for married couples to $1200); Individual Income Tax Act of 1944, Pub. L. No. 78-315, 58 Stat. 231 (lowering exemptions for married couples to $1000).
118. IRS, SOI BULLETIN HISTORICAL TABLE 23, U.S. INDIVIDUAL INCOME TAX: PERSONAL EXEMPTIONS AND LOWEST AND HIGHEST BRACKET TAX RATES, AND TAX BASE FOR REGULAR TAX, TAX YEARS 1913-2008 (2009), available at http://www.irs.gov/taxstats/article/0,id=175910,00.html.
119. Individual Income Tax Act of 1944, Pub. L. No. 78-315, 58 Stat. 231, 236-37 (1944).
120. See RANDOLPH E. PAUL, TAXATION IN THE UNITED STATES 379-86 (1954) (describing the 1944 simplification efforts).
121. In 1960, there were 16 million mortgaged homeowners and 24 million itemizers. By 1970 there were 20 million mortgaged homeowners and 35 million itemizers. Id. at 651; Individual Deductions, supra note 16.
122. By comparison, only 35.5% of taxpayers itemized in 2006
123. HOUSING AND HOME FINANCE AGENCY, A SUMMARY OF THE EVOLUTION OF HOUSING ACTIVITIES IN THE FEDERAL GOVERNMENT (1950)
124. For a taxpayer subject to the 90% marginal tax rate, for example, every $1.00 of itemized deduction equaled $0.90 of tax saving. By comparison, if this taxpayer were subject to a 30% marginal tax rate, every $1.00 of itemized deductions would be worth $0.30.
125. Between 1950 and 1960, the cost of the standard deduction grew only slightly in absolute terms from $12 billion to $13.1 billion. Id.
126. See Daniel H. Holland & C. Harry Kahn, Comparison of Personal and Taxable Income, in JOINT COMMITTEE ON THE ECONOMIC REPORT (JCER), FEDERAL TAX POLICY FOR ECONOMIC GROWTH 313 (ed. U.S. Cong., 1955) [hereinafter JCER] ("[T]he postwar upsurge in consumer debt, interest rates and home ownership caused interest deductions to grow more rapidly than any of the other deductible items.").
127. Calculated from FACTS AND FIGURES ON GOVERNMENT FINANCE 85 (Sumeet Sagoo ed., 38th ed. 2005).
128. The power of the federal income tax was even more robust when accounting for the corporate income tax. Together, the two taxes produced 79% of federal receipts in 1944, 66.5% in 1950, and 67.3% in 1960. Id.
129. Surrey had started referring to the statutory rates as "paper rates" as early as 1953
130. Stanley S. Surrey, Our Schizophrenic Income Tax 5 (1953) (unpublished manuscript, on file with Law & Contemporary Problems and The Stanley S. Surrey Papers, Harvard Law School Library, Modern Manuscript Division, Box 23, Folder 7).
131. Randolph E. Paul, Erosion of the Tax Base and Rate Structure, 11 TAX L. REV. 203, 204 (1956).
132. see also Samuel H. Hellenbrand, Itemized Deductions for Personal Expenses and Standard Deductions in the Income Tax Law, in HOUSE COMM. ON WAYS & MEANS, 86TH CONG., TAX REVISION COMPENDIUM: COMPENDIUM OF PAPERS ON BROADENING THE TAX BASE 375, 387-88 (Comm. Print 1959) (examining discrepancies between national income and product accounts and taxable income).
133. S. REP. NO. 84-1310, at 5 (1955) ("[O]nly about 40 percent of... personal income enters the tax base.").
134. C. Harry Kahn, Personal Deductions in the Individual Income Tax, in TAX REVISION COMPENDIUM.
135. see also Joseph A. Pechman, Erosion of the Individual Income Tax, 10 NAT'L TAX J. 1, 6 (1957) ("In theory, the only deductions that are absolutely essential under a personal net income tax are those which make allowances for the cost of earning income.").
136. HENRY C. SIMONS, PERSONAL INCOME TAXATION: THE DEFINITION OF INCOME AS A PROBLEM OF FISCAL POLICY 50 (1938).
137. see also Robert M. Haig, The Concept of Income-Economic and Legal Aspects, in READINGS IN THE ECONOMICS OF TAXATION 54 (Richard A. Musgrave & Carl Shoup eds., 1959).
138. The "Haig-Simons" definition of income is more accurately termed the "Schanz-Haig-Simons" definition. According to Simons himself, German economist Georg Schanz articulated an "original and challenging" concept of income.
139. See also SIMONS, supra, at 58-99 (treating Schanz prominently in discussing the income concept). Almost no modern treatments of the income concept give Schanz his due.
140. But see J. Clifton Fleming & Robert J. Peroni, Reinvigorating Tax Expenditure Analysis and Its International Dimension, 27 VA. TAX REV. 437, 450 (2008) (discussing the baseline for traditional tax expenditure analysis as the "Schanz-Haig-Simons" definition of income).
141. ROBERT M. HAIG, THE FEDERAL INCOME TAX 7 (1921).
142. See Richard Goode, Imputed Rent of Owner-Occupied Dwellings Under the Income Tax, 15 J. FIN. 504, 504 (1960) (stating that "services of the dwelling give the owner power to satisfy his wants, and that power is susceptible of valuation in terms of money").
143. Simons considered the failure of the federal income tax to impute rent an "egregious discrimination between renters and homeowners."
144. Melvin I. White, Deductions for Nonbusiness Expenses and an Economic Concept of Net Income, in JCER.
145. For a classic discussion of the income concept and interest deductibility
146. (observing that most tax subsidies had never been subject to "any systematic legislative review" respecting "their consistency with the income concept underlying the tax, or alternatively their suitability in furthering certain social and welfare objectives")
147. Id. at 9. At $4 billion, the interest deduction cost slightly less than the deductions for charitable contributions ($4.4 billion) and taxes ($5.1 billion). Id.
148. Individual Income Taxes and Housing
149. Equity vs. Efficiency and the U.S. Tax System in Historical Perspective
150. (stating that advocates seeking special treatment under the income tax "are able to make their arguments sound more convincing" due to the "apparently high but unreal rate structure")
151. Federal Tax Policy for Economic Growth and Stability: Hearings Before the Subcomm. on Tax Policy of the Joint Comm. on the Economic Report, 84th Cong. 283 (1956) [hereinafter Hearings on Tax Policy] (statement of Mr. Holland) (20%); id. at 243 (statement of Harold M. Groves) (25%).
152. See Hearings on Tax Policy, supra note 182
153. See generally Federal Expenditure Policy for Economic Growth and Stability: Hearings Before the Joint Economic Comm., 85th Cong. (1957).
154. JULIAN ZELIZER, TAXING AMERICA: WILBUR D. MILLS, CONGRESS, AND THE STATE, 1945-1975, at 138 (1998).
155. See, e.g., SIMON KUZNETS, NATIONAL INCOME AND ITS COMPOSITION, 1919-1938, at 735 (1941) (calculating net imputed rent for 1938 at $1.42 billion).
156. Donald B. Marsh, The Taxation of Imputed Income, 58 POL. SCI. Q. 514, 522 (1943) (estimating gross imputed rent for 1940 at $4.75 billion and net imputed rent at $1.9 billion).
157. The Department of Commerce Bureau of Economic Analysis provided figures on gross rental income as early as 1929
158. See BUREAU OF ECON. ANALYSIS, NATIONAL ECONOMIC ACCOUNTS, TABLE 1.12, IMPUTATIONS IN THE NATIONAL INCOME AND PRODUCT ACCOUNTS (2008), http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=299&Freq=Year&FirstYear=2006&LastYear=2007.
159. Melvin I. White, Consistent Treatment of Items Excluded and Omitted from the Individual Income Tax Base, in TAX REVISION COMPENDIUM.
160. Trammell, Personal Deductions and the Federal Income Tax, in TAX REVISION COMPENDIUM, supra note 164, at 457, 467 (noting British taxation of imputed rent)
161. The Supreme Court had in fact ruled that excluding imputed rent did not violate the Constitution
162. See Brushaber v. Union Pac. R.R., 240 U.S. 1, 23-24 (1916) (considering and rejecting the argument that "[d]iscrimination and want of due process results... from the fact that the owners of houses in which they live are not compelled to estimate the rental value in making up their incomes, while those who are living in rented houses and pay rent are not allowed, in making up their taxable income, to deduct rent which they have paid").
163. WILLIAM VICKREY, AGENDA FOR PROGRESSIVE TAXATION 19-21 (1947)
164. (observing that without imputing rental income "it seems doubtful that we move closer to the ideal solution by widening the area of discrimination as is done by the current practice of allowing the deduction of personal interest")
165. see also Bruce Lee Balch, Appraisal of Personal Deductions, in TAX REVISION COMPENDIUM 435, supra note 164, at 435-36 (criticizing treatment whereby "a person purchasing a home under a long-term mortgage is permitted to deduct a large portion of his housing expenses, while a person renting similar accommodations receives no deduction")
166. (stating that the exclusion was "inequitable and decidedly unneutral in its effect on the decision to invest in homeownership as compared with alternative assets")
167. Hearings on Tax Policy, supra note 182, at 288 (statement of Mr. Kahn, National Bureau of Economic Research, noting "awareness on the part of the prospective purchasers of homes that they will have an imputed nontaxable income, in the sense that they will own an asset the income from which is not taxed"); id. at 305 (statement of Mr. Ture, testifying that the MID results in "some redirection of resource use").
168. See JANE G. GRAVELLE, CRS REPORT FOR CONGRESS: HISTORICAL EFFECTIVE MARGINAL TAX RATES ON CAPITAL INCOME 2-3 (2004) (reporting marginal effective tax rates on owner-occupied housing between -1% and 1% from 1953 to 1967 and between 70% and 45% on corporate capital income).
169. Harvey E. Brazer, The Deductibility of State and Local Taxes Under the Individual Income Tax, in TAX REVISION COMPENDIUM.
170. Revenue Act of 1951, Pub. L. No. 183-521, 65 Stat. 452.
171. Revenue Act of 1964, Pub. L. No. 88-272, 78 Stat. 19. In 1964, Congress set the exclusion at $20,000 at a time when the median home value was roughly $12,000.
172. See U.S. CENSUS BUREAU, HISTORICAL CENSUS HOUSING TABLES, HOME VALUES (2004), http://www.census.gov/hhes/www/housing/census/historic/values.html.
173. When one considers these two provisions alongside § 1014 (tax-free step-up in basis at death for qualifying gifts), it becomes even clearer that nearly all gains from the sale of a principal residence would have escaped tax
174. Surrey was without question the most influential postwar figure in tax law and policymaking. As a professor at Harvard Law School for more than forty years, he founded the school's renowned international tax program and taught several generations of domestic and international tax lawyers, officials, and policymakers.
175. He served on numerous postwar tax missions, setting up tax regimes around the world. In addition, he published widely on U.S. and international tax systems, authoring hundreds of articles and books, many of which argued forcibly for a tax expenditure budget.
176. In addition to his tenure as Assistant Secretary, Surrey served as Treasury's Tax Legislative Counsel from 1942 through 1944 and again from 1946 through 1947, Special Counsel to the House Ways and Means Subcommittee on Internal Revenue Administration from 1951 through 1952, and Consultant to the Treasury and Congress between 1953-54 on codification of the internal revenue laws
177. Stanley S. Surrey, Agenda for Consideration of Tax Research Topics Possessing a Significant Legal Orientation 35-36 (1961) (unpublished manuscript, on file with Law & Contemporary Problems and with The Stanley S. Surrey Papers, Harvard Law School Library, Modern Manuscript Division Box 23, Folder 7).
178. See Stanley S. Surrey, Conference on Revenue Act of 1964 (1964), in TAX POLICY AND TAX REFORM: 1961-1969, at 57, 59 (William F. Hellmuth & Oliver Oldman eds., 1973) (describing the measure as a "proposal to broaden the tax base by limiting personal deductions and to use the revenue gained to further reduce rates").
179. Builders Oppose Exemption Limit, Assail New Tax Plan to Cut Home-Owner Deductions, N.Y. TIMES, Feb. 12, 1963, at A9.
180. Realty Men Call Tax Bill a Blow to the Homeowner, N.Y. TIMES, Feb. 20, 1963, at 1.
181. See Tax Reform Act of 1969: Hearings on H.R. 13270 Before the S. Comm. on Finance, 91st Cong. 669, 672 (1969) (statement of Mr. Surrey, noting that since enactment of the standard deduction "important gains in simplicity and equity have steadily eroded away.... The result is increased complexity for taxpayers and a greater spread of actual tax liabilities for taxpayers largely similarly situated.").
182. Surrey was not the progenitor of the idea for a budget-like accounting of federal revenues spent through the tax system
183. But he pursued the concept more rigorously than anyone before or after him, leveraging the full resources of the federal government to formulate the first comprehensive analog to the direct expenditure budget
184. Neither the concept of tax expenditure analysis nor the creation of a tax expenditure budget went unopposed by Surrey's contemporaries. Boris Bittker was particularly suspicious of the concept, especially its assumption of a touchstone definition of income.
185. See, e.g., Boris I. Bittker, Income Tax Deductions, Credits, and Subsidies for Personal Expenditures, 16 J.L. & ECON. 193, 207-09 (1973).
186. Boris L. Bittker, Accounting for Federal "Tax Subsides" in the National Budget, 22 NAT'L TAX J. 244, 261 (1969).
187. Surrey responded gamely to these criticisms
188. See generally Stanley S. Surrey & William F. Hellmuth, The Tax Expenditure Budget: Response to Professor Bittker, 22 NAT'L TAX J. 528 (1969).
189. The debate over the efficacy of tax expenditure analysis has raged for over forty years
190. Stanley S. Surrey, The United States Income Tax System-The Need for a Full Accounting, in TAX POLICY AND TAX REFORM: 1961-1969, supra note 229, at 575, 575-76.
191. see also Stanley S. Surrey, The Tax Expenditure Budget: A Conceptual Analysis, in TAX POLICY AND TAX REFORM: 1961-1969, supra note 229, at 587, 588 (noting that the budget "understates the role of Federal Government financial influences on the behavior of individuals and businesses on income distribution").
192. at 581 (discussing differences in statutory and effective tax rates for corporate taxpayers)
193. Surrey returned repeatedly to the theme of overburdening the tax instrument
194. See, e.g., Stanley S. Surrey, Our Troubled Tax Policy: False Routes and Proper Paths to Change, 12 TAX NOTES 179, 190 (1981) (stating that "Congress and the Executive are using our tax system to carry far too great a load").
195. at 584-85 (arguing that overuse of the tax system had blocked "imaginative and broad thinking" about alternative policy solutions)
196. Surrey was invoking Wilbur Mills here
197. See 113 CONG. REC. 36404-05 (1967) (statement of Rep. Mills describing and criticizing "back-door spending" through the tax code). He did likewise elsewhere to underscore the affinity between the tax expenditure budget and influential members of Congress.
198. See Stanley S. Surrey, Taxes and the Federal Budget, in TAX POLICY AND TAX REFORM: 1961-1969.
199. ("Since the tax expenditure programs are imbedded in the revenue side of the Budget and their cost is not disclosed, they go essentially unexamined for long periods, in contrast with direct expenditures.").
200. Stanley S. Surrey, Tax Assistance for Housing: Its Implications for the Federal Tax Structure and the Federal Budget, in TAX POLICY AND TAX REFORM: 1961-1969.
201. Surrey's primary motivation for creating a tax expenditure budget was to "restate the tax program as a direct expenditure program and ask whether, as such, it represents desirable policy."
202. ("I doubt that any of these special tax treatments could withstand the scrutiny of careful program analysis, and I doubt that if these were direct programs we would long tolerate the inefficiencies that such program analysis would disclose.").
203. The entire report is reprinted in Stanley S. Surrey, The Tax Expenditure Budget: A Conceptual Analysis, in TAX POLICY AND TAX REFORM: 1961-1969.
204. Comparatively, the official 2010 tax expenditure budget includes 165 line items reflecting over $1 trillion in foregone revenue. O. M.B. Report.
205. The remaining $250 million reflected the expenditure for excess depreciation on rental housing. In this first accounting of tax expenditures, the MID ranked seventh in terms of cost.
206. In this way and others, Treasury's tax expenditure analysis did "not attempt a complete listing of all the tax provisions which vary from a strict definition of net income." Most of the omissions were attributable to measurement difficulties and to "where the case for their inclusion in the income tax base stands on relatively technical or theoretical tax arguments."
207. Today's tax expenditure estimators face the same considerations and in fact draw different conclusions with respect to what to include in the accounting. The JCT does not impute rental income in its analysis, for instance, preferring to treat subsidies for housing as part of "a social policy agenda that transcends the tax law" and "as an exception to the general rule for personal expenditures (no deduction of interest expense or other costs)."
208. Edward D. Kleinbard, Chief of Staff, Joint Committee on Taxation, Address to Chicago-Kent College of Law Federal Tax Institute: Rethinking Tax Expenditures (May 1, 2008).
209. see also JOINT COMMITTEE ON TAXATION, A RECONSIDERATION OF TAX EXPENDITURE ANALYSIS 13, 45 (2008)
210. The OMB, on the other hand, includes net rental income as a tax expenditure item on grounds that a comprehensive "baseline tax system generally would tax all income under the regular tax rate schedule," and "would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income."
211. Between 1968 and 1973, the Treasury produced an accounting of tax expenditures using
212. Treasury Bureau of Accounts data that looked to prior years. In early 1974, the nonprofit Tax Analysts & Advocates (TA/A) (now known as Tax Analysts) produced a prospective-looking tax expenditure budget.
213. Authors Jere Brannon (longtime Director of Treasury's Office of Tax Analysis and supervisor of Treasury's tax expenditure research from 1966 through 1969), Samuel Hastings-Black (tax attorney), and James S. Byrne (Director of TA/A) generated an accounting of tax expenditures that Congress could analyze alongside the regular direct expenditure budget.
214. Gerard M. Brannon, Samuel Hastings-Black & James S. Byrne, Fiscal Year 1975 Tax Expenditure Budget, 2 TAX NOTES 4 (1974).
215. Due to TA/A's efforts, Congress began requiring the Treasury to publish a current-year accounting of tax expenditures that accompanied the President's direct expenditure budget
216. See Budget and Impoundment Control Act of 1974, Pub. L. No. 93-344, 88 Stat. 297, 323.
217. Surrey offered similar recharacterizations of other tax expenditure items. See id. at 228-29 (restating the deduction for charitable contributions as a direct expenditure program, the Division of Charitable and Educational Assistance, that distributed cash to wealthy donors).
218. Surrey, supra note 241, at 634 (criticizing accelerated depreciation for being "costly and inefficient as a means of getting more housing or other construction" and for spawning the market for real estate tax shelters)
219. DEP'T OF THE TREASURY, TAX REFORM STUDIES AND PROPOSALS (1969)
220. Congress had requested the comprehensive study as part of the Revenue and Expenditure Control Act of 1968, supra note 52, but President Johnson decided against releasing the study on grounds of fairness to the incoming Nixon Administration
221. With the support of Congressional leaders, the Treasury turned its study over to the Nixon team, which subsequently turned it over to the House Ways and Means and Senate Finance committees
222. Stanley S. Surrey, Tax Reform, 1969, in TAX POLICY AND TAX REFORM: 1961-1969.
223. For a fuller discussion of the proposal, see id. at 142-52.
224. Tax Reform Act of 1969: Hearings on H.R. 13270 Before the S. Comm. on Finance, 91st Cong. 3404-24 (1969) (statement of Mr. Surrey).
225. See SURREY, supra note 33, at 258 (calling it "appropriate" to apply the ratable allocation approach to the MID)
226. Charles Davenport & Kenneth A. Goldman, The Minimum Tax for Tax Preferences and the Interest Deduction Limitation Under the Tax Reform Act of 1969, 16 WAYNE L. REV. 1223, 1235 (1970).
227. H.R. REP. NO. 91-413, at 80-81 (1969).
228. Calculated from id
229. The percentage rose to 33% by 1981, an increase that was due primarily to rising interest rates, inflation, an unindexed standard deduction, and bracket creep
230. In 1969, 18% of taxpayers in the $0-5000 bracket itemized, as did 53% in the $5000-10,000 bracket, and 74% in the $10,000-15,000 bracket. IRS, U.S. DEP'T OF TREASURY, INDIVIDUAL TAX RETURNS FOR 1969, at 82 (1970).
231. By 1977, this figure dropped to only 2%, 8%, and 22%, respectively. IRS, U.S. DEP'T OF TREASURY, INDIVIDUAL TAX RETURNS FOR 1977 34 (1978).
232. Joan C. Williams, It's High Time to Get Homeowners' Deductions Under Control, 12 TAX NOTES 963, 968 (1981).
233. William F. Hellmuth, Homeowner Preferences, in COMPREHENSIVE INCOME TAXATION 163, 166 (Joseph A. Pechman, ed., 1977).
234. See, e.g., A.B. Atkinson, Housing Allowances, Income Maintenance, and Income Taxation, in THE ECONOMICS OF PUBLIC SERVICES (Martin S. Feldstein & Robert P. Inman eds., 1977) (measuring the optimal tax on imputed rent).
235. Gordon A. Hughes, Housing and the Tax System, in PUBLIC POLICY AND THE TAX SYSTEM 74 (Gordon A. Hughes & Geoffrey M. Heal eds., 1980).
236. See Paul E. Steiger, Carter Seen Vulnerable for Suggesting an End to Mortgage Tax Break, WASH. POST, Mar. 6, 1976, at E17 ("Jimmy Carter is not alone in suggesting... that the nation should do away with tax deductions for interest payments on mortgage.").
237. James T. Wooten, Carter Charges Jackson with Lies and Distortions, N.Y. TIMES, Mar. 6, 1976, at 10.
238. 123 CONG. REC. 21988, 21992 (1977) (statement of Sen. Kennedy).
239. Kenneth Harney, Tax Credit May Reduce Break on Mortgage Interest Deduction, WASH. POST, July 16, 1977, at D1.
240. Brock Proposes "Tax Simplification Act," TAX NOTES, Mar. 22, 1976, at 22 (describing Sen. Bill Brock's proposal).
241. 123 CONG. REC. at 21992.
242. Hathaway Would Replace Mortgage Interest Deduction with Credit, TAX NOTES, June 23, 1975, at 25
243. Montoya Would Substitute Credit for Mortgage Interest Deduction, TAX NOTES, July 21, 1975, at 11
244. Koch Defends Property Tax Credit for Renters, TAX NOTES, Jan. 24, 1977, at 22.
245. See DAVID F. BRADFORD & U.S. TREASURY TAX POLICY STAFF, BLUEPRINTS FOR BASIC TAX REFORM 77-81 (2d ed. 1984).
246. Calculated from INDIVIDUAL DEDUCTIONS, supra note 16 (showing that 26.4% of taxpayers itemized in tax year 1977).
247. The deductions for mortgage interest and property taxes eased rising costs associated with homeownership (including rising mortgage payments on newly purchased or refinanced homes) during an inflationary period
248. CONGRESSIONAL BUDGET OFFICE, REDUCING THE DEFICIT: SPENDING AND REVENUE OPTIONS 1 (1983)
249. 127 CONG. REC. 4213 (1981) (statement of Sen. Baucus).
250. Focus on Treasury, Limitation on Mortgage Interest Deduction Would Have "Devastating Impact," Attorney Says, 12 TAX NOTES 744, 744 (1981)
251. President Ronald Reagan, Third State of the Union Address (Jan. 25, 1984).
252. President Ronald Reagan, Third State of the Union Address (Jan. 25, 1984).
253. Charles E. McLure Jr., The Tax Treatment of Owner-Occupied Housing: The Achilles' Heel of Tax Reform?, in TAX REFORM AND REAL ESTATE 219, 219 (James R. Follain ed., 1986).
254. For an insider's look at the Treasury's efforts, see C. EUGENE STEUERLE, THE TAX DECADE: HOW TAXES CAME TO DOMINATE THE PUBLIC AGENDA 99-114 (1992).
255. C. Eugene Steuerle, Why I Hate Campaign Time, 72 TAX NOTES 1821, 1822 (1996).
256. see also JANE G. GRAVELLE, THE ECONOMIC EFFECTS OF TAXING CAPITAL INCOME 204 (1994) (estimating that homeowners enjoy "a net subsidy rather than a tax (a negative tax rate)").
257. ("Even if one grants the case for substantial tax preferences for owner-occupied housing, it is impossible to justify this distributional pattern of benefits. The failure to tax income for owner-occupied housing like other income means, by itself, that the income tax cannot be wholly fair.").
258. 1 DEP'T OF THE TREASURY, TAX REFORM FOR FAIRNESS, SIMPLICITY, AND ECONOMIC GROWTH viii-x (1984)
259. The Treasury proposal preserved the MID for principal residences only, a restriction that disallowed deductions for mortgage interest paid on vacation homes or second homes
260. The recreational real estate lobby reacted violently
261. Treasury's Reform Plan: Congress Is Aloof, Special Interests Are Scrambling
262. PRESIDENT RONALD REAGAN, THE PRESIDENT'S TAX PROPOSALS TO THE CONGRESS FOR FAIRNESS, GROWTH, AND SIMPLICITY (1985)
263. The President's plan repealed the deduction while the Treasury's phased it out over two years
264. Despite concessions, real estate lobbyists wanted more
265. See Lee A. Sheppard, Tax Reform Redux: The State of the Record, 28 TAX NOTES 1215, 1225 (1985) (writing "they want it all....
266. The NAR's shopping list of preferences it wants to see preserved is a long one; 17 provisions and 70 percent of the Administration plan's revenue raised would be out the door if NAR got its way.").
267. See generally, TIMOTHY J. CONLAN, MARGARET T. WRIGHTSON & DAVID R. BEAM, TAXING CHOICES: THE POLITICS OF TAX REFORM (1989)
268. BIRNBAUM & MURRAY
269. See, e.g., C. EUGENE STEUERLE, CONTEMPORARY U.S. TAX POLICY 130 (2004).
270. For discussion of the successes and failures of TRA86
271. DO TAXES MATTER?: THE IMPACT OF THE TAX REFORM ACT OF 1986, at 130 (Joel Slemrod, ed., 1990).
272. Pub. L. No. 99-514, 100 Stat. 2085 (1986), at 2085.
273. See GEORGE F. BREAK & JOSEPH A. PECHMAN, FEDERAL TAX REFORM: THE IMPOSSIBLE DREAM? 126-34 (1975).
274. Pub. L. No. 99-514, 100 Stat. 2085 (1986), at 2246-48.
275. See Patric H. Hendershott, Tax Changes and Capital Allocation in the 1980s, in THE EFFECTS OF TAXATION ON CAPITAL FORMATION 259 (Martin Feldstein ed., 1987).
276. Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, 101 Stat. 1330, 1330-385.
277. Robert J. Wells, It's Time to Revisit the Interest Deduction Rules, 60 TAX NOTES 649, 652 (1993).
278. See Catherine Hubbard, Home Equity Loans Draw Renewed Concern, 52 TAX NOTES 872, 872 (1991)
279. Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788, 836-41.
280. William J. Clinton, Remarks on the National Homeownership Strategy (June 5, 1995), available at http://www.presidency.ucsb.edu/ws/index.php?pid=51448.
281. In 1970, the government created the Federal Home Loan Mortgage Corporation, or "Freddie Mac," to compete with Fannie Mae in the secondary mortgage market
282. Joe Becker et al., White House Philosophy Stoked Mortgage Bonfire, N.Y. TIMES, Dec. 31, 2008, at A1.
283. Exec. Order No. 13,369, 3 C.F.R. 155 (2006), available at http://govinfo.library.unt.edu/taxreformpanel/executive-order.html.
284. Martin A. Sullivan, The Economics of the American Dream, 106 TAX NOTES 407, 407 (2005).
285. THE PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX REFORM, SIMPLE, FAIR, AND PROGROWTH: PROPOSALS TO FIX AMERICA'S TAX SYSTEM 73 (2005) [hereinafter TAX REFORM PANEL]
286. The Home Credit was available to all taxpayers with mortgage principal and equaled 15% of mortgage interest paid, subject to regional indexing. The Panel also recommended repealing the subsidy for interest paid on second homes and home equity loans, and extending the length of ownership before a taxpayer could qualify for the § 121 exclusion.
287. Heidi Glenn, Tax Reform Panel's Ideas Cause Stir in Washington, 109 TAX NOTES 415, 418 (2005) (quoting Rep. Katherine Harris).
288. In 2001, researchers reported that low-and moderate-income households were already significantly overinvested in housing: 60% of asset holdings versus an optimal portfolio allocation of 10%
289. George McCarthy et al., The Economic Benefits and Costs of Homeownership: A Critical Assessment of the Research 32 (Research Inst. for Hous. Am., Working Paper No. 01-02, 2001).
290. For heavily leveraged home purchases, even nominal price declines of 3% to 5% pushed these households into negative equity positions
291. Rich Smith, Raise My Taxes, Please, MOTLEY FOOL, Mar. 9, 2009, http://www.fool.com/investing/general/2009/03/09/raise-my-taxes-please.aspx (author recalling the words of his real estate agent in 2001).
292. Edward L. Glaeser, Killing (or Maiming) a Sacred Cow: Home Mortgage Deductions, N.Y. TIMES ECONOMIX BLOG, Feb. 24, 2009, http://economix.blogs.nytimes.com/2009/02/24/killing-ormaiming-a-sacred-cow-home-mortgage-deductions/.
293. For the relationship between "temperance" and prices and returns of other assets, see Michael C. Fratantoni, Homeownership and Investment in Risky Assets, 44 J. URBAN ECON. 27, 31 (1998).
294. Marjorie Flavin & Takashi Yamashita, Owner-Occupied Housing and the Composition of the Household Portfolio over the Life Cycle 27 (Nat'l Bureau of Econ. Research, Working Paper No. W6389, 1998).
295. See John E. Anderson et al., Capping the Mortgage Interest Deduction, 60 NAT'L TAX J. 769, 769 (2007) (finding that the MID distorts "the user cost of owner-occupied housing for taxpayers")
296. See Martin Gervais, Housing Taxation and Capital Accumulation, 49 J. MONETARY ECON. 1461, 1482 (2002).
297. Lori Taylor, Does the United States Still Overinvest in Housing?, FED. RESERVE BANK DALLAS ECON. REV. 10, 16 (1998).
298. See William G. Gale et al., Encouraging Homeownership Through the Tax Code, 115 TAX NOTES 1171, 1171 (2007) (stating that the MID "serves mainly to raise the price of housing and land").
299. Richard K. Green et al., Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing and Their Sources, 95 AM. ECON. REV. 334, 335 (2005) (finding significant price premiums associated with the MID).
300. Dennis Capozza et al., Taxes, Mortgage Borrowing, and Residential Land Prices, in ECON EFFECTS OF FUNDAMENTAL TAX REFORM (Henry Aaron & William Gale eds., 1996) (estimating that the MID increases the price of housing by 10%).
301. See, e.g., Gale et al., supra note 388, at 1179 (concluding that "[b]oth theoretical considerations and empirical evidence suggest" that one of the main effects of the MID is to increase LTV ratios).
302. See Joseph Gyourko & Richard Voith, Capitalization of Federal Taxes, the Relative Price of Housing, and Urban Form: Density and Sorting Effects, 32 REG'L SCIENCE & URBAN ECON. 673, 685 (2002).
303. See Joseph Gyourko & Todd Sinai, The Spatial Distribution of Housing-Related Ordinary Income Tax Benefits, 31 REAL ESTATE ECON. 527, 557 (2003).
304. Peter Brady et al., Regional Differences in the Utilization of the Mortgage Interest Deduction, 31 PUB. FIN. REV. 327, 360-61 (2003).
305. See Beverly I. Moran & William Whitford, A Black Critique of the Internal Revenue Code, 1996 WIS. L. REV. 751, 775-79 (1996).
306. Dorothy A. Brown, Shades of the American Dream, 87 WASH. U. L. REV. (forthcoming 2010).
307. Edward L. Glaeser & Jesse M. Shapiro, The Benefits of the Home Mortgage Interest Deduction 6 (Nat'l Bureau of Econ. Research, Working Paper No. 9284, 2002) (observing that "as owners have organized they have started to act like local cartels, restricting new entry into the market").
308. See McCarthy et al., supra note 381, at 34 (noting that "[i]ncreased mobility costs" to homeownership "make[] the national economy inflexible").
309. (concluding that "more dramatic swings in employment associated with the construction industry and the volatility of housing investment suggest that the housing market has a destabilizing effect on the economy as a whole")
310. Andrew Caplin et al., Collateral Damage: Refinancing Constraints and Regional Recessions, 29 J. MONEY CREDIT & BANKING 496, 512-14 (1997).
311. Glaeser & Shapiro, supra note 394, at 33 (discussing homeowners' "incentive to restrict supply of new housing in order to raise prices")
312. In addition, recent research indicates that the long-touted but unproven putative social benefits associated with homeownership and the policies propping it up remain unsubstantiated
313. See Glaeser & Shapiro, supra note 394, at 30 (characterizing these claims as based on observed "correlations without any strong evidence for causality")
314. McCarthy et al., supra note 381, at 43 ("Evidence regarding the societal economic benefits of homeownership is highly conjectural.").
315. Roberta F. Mann, The (Not So) Little House on the Prairie: The Hidden Costs of the Home Mortgage Interest Deduction, 32 ARIZ. ST. L.J. 1347, 1361 (2000).
316. James Poterba & Todd Sinai, Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income, 98 AM. ECON. REV. 84, 87-89 (2008).
317. Charles A. Capone Jr., Taxation and Housing Tenure Choice: The Case for Moderate Income Homeownership, 4 J. HOUSING ECON. 328, 345-47 (1994).
318. Richard Voith, Does the Federal Tax Treatment of Housing Affect the Pattern of Metropolitan Development?, FED. RESERVE BANK OF PHIL. BUS. REV., Mar.-Apr., 1999, at 8.
319. See also Adam Carasso et al., Making Tax Incentives for Homeownership More Equitable and Efficient, app. at tbl.2 (2005) (reporting that only 3% of the benefits from the MID and the deduction for property taxes go to taxpayers in the bottom three quintiles of taxpayers).
320. John E. Anderson & Atrayee Ghosh Roy, Eliminating Housing Tax Preferences: A Distributional Analysis, 10 J. HOUSING ECON. 41, 55-56 (2001).
321. JOINT COMM. ON TAXATION, ESTIMATES OF FEDERAL TAX EXPENDITURES FOR FISCAL YEARS 1987-2001, at 18 (1986). In 1986, median household income equaled $24,897, and $50,000 indexed to 2009 dollars corresponded to roughly $30,000 in current dollars.
322. U.S. CENSUS BUREAU, HISTORICAL TABLES-HOUSEHOLDS, TABLE H-8, MEDIAN HOUSEHOLD INCOME BY STATE: 1984-2007 (2009), available at http://www.census.gov/hhes/www/income/histinc/h08.html.
323. JOINT COMM. ON TAXATION, ESTIMATES OF FEDERAL TAX EXPENDITURES FOR FISCAL YEARS 2008-2012 76 (2008). In 2007, national median household income equaled slightly more than $50,000. U.S. CENSUS BUREAU.
324. Gerald Prante, Who Benefits from the Home Mortgage Interest Deduction?, TAX FOUNDATION, FISCAL FACTS NO. 49 (Feb. 6, 2006), available at http://www.taxfoundation.org/research/show/1341.html.
325. In 2005, there were 74.931 million homeowners, U.S. CENSUS BUREAU, 2009 STATISTICAL ABSTRACT, tbl.956 (2009), available at http://www.census.gov/compendia/statab/tables/09s0956.pdf, but only 38.575 million taxpayers claimed the MID, INTERNAL REVENUE SERVICE, SOI BULLETIN, HISTORICAL TABLE 1, INDIVIDUAL INCOME TAX RETURNS: SELECTED INCOME AND TAX ITEMS, 1999-2006, available at http://www.irs.gov/taxstats/article/0,,id=175788,00.html.
326. Of the 48.4 million homeowners with outstanding mortgage debt, U.S. CENSUS BUREAU, supra note 408, only 38.56 million claimed the MID, INTERNAL REVENUE SERVICE, supra note 408.
327. The remaining 9.84 million mortgaged homeowners (20%) received no benefit from the MID.
328. David Cay Johnston, Can You Hear Opportunity Knocking?, 120 TAX NOTES 683, 683-84 (2008)
329. Glaeser & Shapiro, supra note 394, at 3; see also Gale et al., supra note 388, at 1179 (concluding that the MID "has little if any positive effect on homeownership").
330. Calvin H. Johnson, Was It Lost?: Personal Deductions Under Tax Reform, 59 SMU L. REV. 689, 717 (2006).
331. Letter from Charles McMillan, President, National Association of Realtors, to President Barack Obama (Feb. 26, 2009) (on file with Law & Contemporary Problems). 418.
332. See Donald Bruce & Douglas Holtz-Eakin, Apocalypse Now?: Fundamental Tax Reform and Residential Housing Values (Nat'l Bureau of Econ. Research, Working Paper No. 6282, 1997) (calling drastic predictions of declines in housing values from repeal of the MID "overstated").
333. See Voith, supra note 402, at 7 ("[Eliminating the MID] would lower the demand for housing, especially for large houses, which would result in a short-run oversupply of these homes
334. The excess supply of large houses would result in declining values for these properties until natural growth in demand restored the balance between supply and demand.").
335. President Bush's tax reform panel, for instance, recommended a five-year phase-in of its plan to replace the MID with a Home Credit
336. See Steven C. Bourassa & William G. Grigsby, Income Tax Concessions for Owner-Occupied Housing, 11 HOUSING POL'Y DEBATE 520, 533-37 (2000).
337. Theodore P. Seto, The Problem with Single-Mindedness, CAL. DAILY J., Apr. 22, 2009, at 6.
338. Economist Martin Sullivan has observed, "Isn't it ironic that current tax law provides the least benefit to borrowers most at risk for foreclosure?" Martin A. Sullivan, Putting Stimulus to Work on the Subprime Crisis, 122 TAX NOTES 171, 175 (2009).
339. See Peter Dreier, The New Politics of Housing: How to Rebuild the Constituency for a Progressive Federal Housing Policy, 63 J. AM. PLANNING ASSOC. 5, 22 (1997).
340. Some of the simplification gains from repealing the MID would be offset by new complexities associated with administering a housing tax credit
341. See GRAVELLE, supra note 327, at 204 ("The major justification for disallowing the deductibility of interest is that it is an indirect way of taxing imputed rental income.").
342. See Gale et al., supra note 388, at 1183 (estimating that a first-time homebuyer's credit could create as many as 3.5 million new homeowners).
343. Richard K. Green & Kerry D. Vandell, Giving Households Credit: How Changes in the U.S. Tax Code Could Promote Homeownership, 29 REGIONAL SCI. & URB. ECON. 419, 439 (1999) (estimating that replacing the MID and deduction for property taxes could raise the rate of homeownership by 5%).
344. See Mortgage Forgiveness Debt Relief Act of 2007, Pub. L. 110-142, 121 Stat. 1803. In 2008, Congress extended this program another four years to 2012. See Emergency Economic Stabilization Act of 2008, Pub. L. 110-343, 122 Stat. 3765, 3807.
345. See Housing and Economic Recovery Act (HERA), Pub. L. 110-289, 122 Stat. 2654, 2888-91 (2008).
346. See American Recovery and Reinvestment Act of 2009, Pub. L. 111-5, 123 Stat. 115, 316-17 (2009).
347. See Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. 111-92, 123 Stat. 2984, 2989-91 (2009).
348. David Streitfeld, With FHA Help, Easy Loans in Expensive Areas, N.Y. TIMES, Nov. 21, 2009, at B1.
349. MICHAEL J. GRAETZ, 100 MILLION UNNECESSARY RETURNS: A SIMPLE, FAIR, AND COMPETITIVE TAX PLAN FOR THE UNITED STATES 104-05 (2008).
350. Roger Runningen & Ryan J. Donmoyer, Obama Asks Volcker to Lead Panel on Tax-Code Overhaul, BLOOMBERG PRESS (Mar. 25, 2009), available at http://www.bloomberg.com/apps/news?pid=20601087&sid=a8yCQsJfpb24&refer=home.