Mitt Romney's $17,000 Fairy Dust

So Mitt Romney is floating the idea of capping deductions at $17,000 in order to pay for his gaping tax cuts for the wealthy. I am very much in favor of the idea of capping itemized deductions - regular readers of the TPV may remember that I had advocated for the Simpson-Bowles plan that, among other things, lowered tax rates and zeroed out deductions. In an ideal tax code, we would have a progressive income tax where all income (whether from work or from "capital gains") treated equally, with rates that are based upon your income level, not your behavior. At the very basic of concepts, I am not particularly fond of the idea of the government skewing the market by the means of tax incentives - whether for investment income or for purchasing a home.

But we're not starting from scratch. We're thinking about making changes to the tax code. Even in that vein, capping deductions at $17,000 would not be such a bad idea if it weren't pure pixie dust in the context of Romney's overall tax proposal. First, it doesn't compensate for even half of the new rich-heavy tax cuts for the, let alone the cost of extending the Bush tax cuts for the uber wealthy. Second, the overall tax plan would still have an impact of lowering the tax burden on the rich while raising it on everyone else. Third, there's no way on Planet Earth you can ever get this passed, as big charities and churches will kill it before it ever gets to Congress.

The proposal $17,000 cap, as a stand-alone policy itself, is actually pretty progressive, finds the Tax Policy Center. Two-thirds of tax filers stick with the standard deduction, and of those who take itemized deductions, 25% of all itemized deductions go to 1% of tax filers, with 80% going to the top 20%. The average for those who take itemized deductions is about $26,000, not counting the massive tax subsidy on employer provided health insurance. Here's what the average amounts for different returns look like:

Keep in mind that these are all average figures, with the actual distribution of benefits from tax deductions looking like this:

Who benefits from tax expenditures

Any way you look at it, limiting deductions as a stand-alone policy, should make the income tax code more progressive.

It should. Unless, of course, the rest of your tax plan is about massively slashing taxes at the top to begin with - slashing them so much that tip-toeing around deductions won't make up the difference. The limitation on deductions will bring in between $1-$2 trillion over 10 years, a pittance compared to Mitt Romney's $5 trillion in new tax cuts, weighed heavily toward the wealthy. So revenue neutrality will require raising taxes on the middle class t make up the difference, since you can eliminate all the deductions for the top few and still come nowhere close to meeting the goal of revenue-neutrality.

Not only that, with the massive tax cut as a precondition, the idea to limit deductions is nothing more than a cynical ploy to fool the American people, as Romney is essentially proposing to give the super rich millions in tax breaks and then asking for a few dollars back by limiting deductions. Conspicuously absent from this limits on deductions, by the way? A limit on corporate deductions! And that is not say nothing of the biggest tax deduction that the rich enjoy - the capital gains tax and the "carried interest" loophole that allows "investment income" to be taxed at much lower rates than income from work.

Last, but not least, there is no way this can get passed by any Congress - a limitation on deductions. Why? Churches and big charities. The top 2% of tax filers claim a near $24,000 deduction on average for charitable donation, with the largest share of charitable donations going, of course, to churches and religious institutions. Limiting deductions - especially if it includes charitable giving - will make big funding for megachurches less lucrative to wealthy donors. Without a wholesale overhauling of the tax code - the interests on behalf of churches and other big charitable organizations won't let this happen. Even with an overhaul it might be a long shot. Do you think the Catholic Church, or the Mormon Church, or the Red Cross for that matter are not going to be up in arms if you try to threaten their donation base?

Mitt Romney is floating ideas and trying to see what sticks. But he's selling snake oil with a bit of fairy dust sprinkled on top. It is a ruse to try to sell his disastrous plan to push the tax burden from the rich to the rest of us, and in the process to bankrupt the social safety net.

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