Wednesday, March 18, 2009

I am doubtful Obama's MID cut-back would affect California much

President Obama has proposed reducing the rate at which households with incomes above $250,000 would benefit from the Mortgage Interest Deduction. The value of the deduction would be reduced from as much as 35 percent to 28 percent.

But here in California, where state income taxes are very high, I calculate that the vast majority of those with incomes in excess of $250,000 pay the Alternative Minimum Tax, which has a top marginal tax rate of 28 percent. (I base this claim on using the NBER TAXSIM model). This means most Californians would not be affected by the proposed change.

Perhaps I am missing something here--if so I would appreciate enlightenment.

9 comments:

Anonymous said...

Doesn't that just make an argument for getting rid of MID altogether, as well as the ATM? Both make the tax code more complex then it needs to be, and probably also end up reducing revenue.

I feel like the MID is part of what caused the current implosion. People felt like they had to buy as much house as possible as a tax strategy. Even if that was bad strategy despite MID, people were convinced. Take away MID and you have fewer people making bad decisions about housing.

The AMT also leads to some bizarre results. Disproportionate affect on large families, and states like California where median incomes are higher but not indexed based on state median income under the I.R.C.

TStockmann said...

Yes, you are missing something. Mortgage interest and charitable deductions are the only ones preserved under AMT.

Richard Green said...

Tstockmann:

I know that. But the top marginal tax rate for the AMT is 28 percent. Thus the 28 percent ceiling wouldn't have an impact for AMT taxpayers.

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