“What’s wrong with our country?,” we wonder. It’s not just that the numbers are bad – unemployment, foreclosure rates, uninsured and segment after segment needing rescuing. We know something is wrong. We want change, but change in this country – where every vested interest is armed with lawyers, lobbyists and PR experts – is hard. We suspect that we are up against something big and influential.
We are on a hunt for the culprits who are keeping us from this needed change: greedy bankers, corrupt financiers, evil pharmaceutical companies, corporate lobbyists, and the list goes on. But the vested interests that keep us from meaningful change are much closer to home. In fact they include my home and probably your home.
Our system is rife with structural distortions that cause or aggravate our problems and prevent urgently needed changes. One reason this is hard for us to see is that it deliberately favors people like us: educated and employed. We who own a house, have employer-provided health care, and figure we will survive our later years even if social security is ill-funded.
We have long enjoyed a system that significantly subsidizes these basic structural supports. We pay no tax on our mortgage interest or health care payments and – amazingly - contribute only the same fixed amount to social security regardless of income.
There was a time when these subsidies served a purpose. But since the middle to upper income families will buy houses, have health insurance and invest in their own retirements even without these subsidies – they have outlived their usefulness.
Bernie Madoff’s culpability may be more singular and despicable than our quiet political insistence on mortgage deductions, but that deduction is what distorts home prices, encourages risky mortgages and fuels mortgage backed securities.
It is impossible to justify disincenting rental property given rising homelessness coincident with nearly 70% home ownership. We have reached a point where the disproportionate support of owner-occupied suburban communities is destroying our social fabric.
Similarly, tax advantages for employer-paid health insurance effectively make those uninsured and under-insured impossible to cover with cost-effective private plans. As long as employer-paid health insurance is subsidized, we are disincenting other options when we need them most.
Capping social security deductions – pretending this is actually a public retirement plan instead of a tax-supported social safety net – is a cynical regressive tax that will do nothing in the coming decades to aid retirees.
Meaningful change starts with correcting the structural distortions we take for granted:
- Phase out the mortgage interest deduction. Start by capping it at some comfortably high number. Reduce the cap each year until it is phased out all together. Five to seven years should give everyone time to make adjustments in their financial and tax planning.
- Make employer-paid health benefits taxable and individual premiums non-deductible. This will level the financial playing field and make it possible to address more affordable health care and broader access.
- Eliminate the cap on Social Security payments.
Fixing these foundational issues paves the way to the change we truly need. Putting a small amount of good regulation back in place at investment banks and in other key spots to help ambitious types focus on long-term goals should be easy by comparison.
Conversely, if we do not change these distortions nothing else we do will make much difference.