TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, October 20, 2012

WSJ: Romney's Tax Deduction Cap: Good Tax Policy, Better Politics

Wall Stret Journal editorial:  Romney's Tax Deduction Cap:  An Idea to Finance Reform and Avoid Political Trench Warfare:

The Obama campaign and the press corps keep demanding that Mitt Romney specify which tax deductions he'd eliminate, but the Republican has already proposed more tax-reform specificity than any candidate in memory. To wit, he's proposed a dollar limit on deductions for each tax filer....

In an October 1 interview with a Denver TV station, Mr. Romney mentioned a cap of $17,000 and said "higher income people might have a lower number." His campaign stresses that these dollar amounts are "just illustrative" and that there are other ways to reduce deductions that in any case would have to be negotiated with Congress.

But details aside, the tax cap is a big idea, and potentially a very good one. The proposal makes economic sense to the extent that it helps to pay for lower marginal tax rates. ...

The idea may be even better politically. The historic challenge for tax reformers is defeating the most powerful lobbies in Washington that exist to preserve their special tax privileges. ... This is one reason President Obama wants Mr. Romney to be more specific: The minute he proposed to limit the mortgage-interest deduction, the housing lobby would do the Obama campaign's bidding by running ads against Mr. Romney's plan. Mr. Romney is right not to fall for this sucker play. By limiting the amount of deductions that any individual tax filer can take, Mr. Romney is avoiding this lobby-by-lobby warfare. ...

WSJ ChartThe political left should have a hard time opposing this because reducing deductions would hit high-income taxpayers the hardest. Out of the 140 million tax returns in 2009, the last year such data are available, only 45 million itemized their deductions. The non-itemizers, who take the standard deduction ($11,900 for joint filers in 2012), would be held harmless by the Romney cap. Most of these are lower- or middle-income earners. The nearby table shows that the dollar value of deductions rises with incomes. ...

Mr. Obama has also called for limiting tax deductions for high-income filers. His budgets have endorsed allowing them to take writeoffs at a rate of 28% instead of 35%. The big difference is that Mr. Romney wants to dedicate the revenue gain from capping deductions to cutting tax rates. Mr. Obama wants to use the money to pay for more spending.

The larger point is that Mr. Romney is serious about reform and has put on the table a serious idea for how to finance and achieve it. That's far more than Mr. Obama has proposed about anything in a second term.

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