Thursday, May 5, 2011
Reducing the budget deficit and stopping the explosion of our national debt will require more tax revenue as well as reduced government spending. But the need for more revenue needn’t mean higher tax rates. As the bipartisan fiscal commission appointed by President Obama stressed last year, tax revenues can be increased substantially by limiting the deductions, credits and exclusions that are essentially government spending by another name. ... At their worst, such tax expenditures create incentives for wasteful borrowing and spending; they have been factors in the mortgage crisis and the rising cost of health care. ...
Despite the strong case for limiting tax expenditures, it is politically difficult to do so because no one wants to give up benefits. So here is a way to curb this loss of revenue without eliminating any individual deduction: limit the total tax saving for any individual to a maximum percentage of his total income. Daniel Feenberg of the National Bureau of Economic Research, Maya MacGuineas of the New America Foundation and I have been studying a reform that would cap the tax reduction that each taxpayer could get from tax expenditures to 2% of his adjusted gross income.
What’s the result? Taxpayers with incomes of $25,000 to $50,000 would pay about $1,000 more in taxes; those with incomes of more than $500,000 might pay $40,000 more.
The cap would affect more than 80% of taxpayers. Although they would continue to benefit from the mortgage deduction, the health insurance exclusion and other tax expenditures, their tax savings would not increase if they took out a larger mortgage or a more expensive insurance policy. Similarly, they would not be penalized and get a lesser tax benefit if they scaled back their mortgage or their health insurance premium by moderate amounts.
A key point to stress about this proposal is that the 2% cap refers to the reduction in an individual’s taxes, not to the size of the tax deduction or exclusion.