Tax Reform

Disclaimer: I'm about to delve into an area that I don't know an awful lot about.

Greg Mankiw wrote today about John McCain's commitment to reforming the tax code by working with the bipartisan Advisory Panel on Tax Reform's recommendations (report here). In concept, it sounds like a great idea to me.

Prof. Mankiw suggests that 90% of economists would support the changes proposed in the commission's report, which I have no reason to doubt. However, I don't think it will get the same support from taxpayers and politicians mainly because of what the Advisory Panel suggests be done with the home mortgage deduction. Currently, home mortgage deductions are available only to those who itemize, and for interest up to $1.1 million of mortgage debt. Under both proposed systems, there would be a home ownership credit equal to 15% of mortgage interest paid. It would be available to all taxpayers, but the size of the mortgage would be "limited to average regional price of housing (limits ranging from about $227,000 to $412,000)."

Our current subprime mortgage problems stem from the fact that with interest rates low, people unfit for standard mortgages were able to afford homes (temporarily!). As I understand it, home ownership (which has historically hovered around 65% of the nation's population) rose to about 75%, which suggests that 10% of us owned homes that maybe we really shouldn't have. Not all of that extra 10% or so have/are going to default on their loans. But I bet that nearly all of them have been planning on the mortgage interest deduction. And I bet almost none would prefer tax simplification to tax advantage. Is it conceivable that the simplification plans would benefit the average homeowner (with somewhere on the order of $220,000 debt) enough to offset the difference in the home mortgage interest deduction?

I understand the distinction between tax deductions (the current system) and credits (the two proposals) is important, but even with a credit under the new system, I believe the difference remains rather stark. I looked in the report for more details about the change to the home mortgage deduction, but I couldn't find discussion past the executive summary.

Has anyone studied tax policy? I think GPPI offers a course, but I certainly (obviously?) haven't taken it.