TaxProf Blog

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

Wednesday, November 14, 2012

Democrats Embrace Romney's Tax Plan to Limit Deductions

With both parties positioning for difficult negotiations to avert a fiscal crisis as Congress returns for its lame-duck session, Democrats are latching on to an idea floated by Mitt Romney to raise taxes on the rich through a hard cap on income tax deductions.

The proposal by Mr. Romney, the Republican presidential nominee, was envisioned to help pay for an across-the-board income tax cut, a move ridiculed by President Obama as window dressing to a “sketchy deal.” But many Democrats now see it as an important element of a potential deficit reduction agreement — and one they can claim to be bipartisan.

The cap — never fully detailed by Mr. Romney — is similar to a longstanding proposal by Mr. Obama to limit income tax deductions to 28 percent, even for affluent households that pay a 35 percent rate. But a firm cap of around $35,000 would hit the affluent even harder than Mr. Obama’s proposal, which has previously gotten nowhere in Congress.

Capping tax breaks deserves a closer look as part of a resolution to the so-called fiscal cliff and an overhaul of the tax code, said Senate Finance Committee Chairman Max Baucus.

Similar-sounding ideas, such as a percentage limitation or a maximum dollar amount of deductions, can have disparate effects on taxpayers, the Montana Democrat said yesterday in an interview with Bloomberg News. “It affects different groups differently and that all has to be better understood,” said Baucus, 70, whose committee has jurisdiction over taxes and entitlement programs. “In theory, you can do anything you want with numbers. I don’t mean to say that facetiously. I just mean it because it’s true. There are all kinds of permutations here, so long as it’s balanced, so long as upper-income Americans are more of the solution.”

Placing a cap on deductions and other tax breaks, floated by Republican presidential candidate Mitt Romney, could be a potential bridge between Democrats who want top earners to pay more and Republicans who want to avoid a tax rate increase.

Reducing tax expenditures to pay for both lower personal income tax rates and deficit reduction may seem like a politically attractive alternative to raising tax rates or cutting entitlements or other spending.

However, many of these tax expenditures are important and popular policy programs on which people now rely. They include the deductibility of mortgage interest, charitable contributions and the exclusion from income of employer-provided health insurance. Some tax expenditures should be cut back and reformed. But when the substantive effects and political realities of large-scale reductions are examined, it becomes clear that there would not be sufficient savings to reduce tax rates and also cut the deficit....

Advocates of extensive tax expenditure reduction argue — correctly — that all deficit reduction choices involve substantive costs and are politically difficult. They then suggest that, when compared to other possibilities, substantially more cuts may be doable than the Congressional research numbers suggest.

Maybe, but I think that’s unlikely when compared to the alternative of restoring the topmost tax brackets to their Clinton-era level.

A recent report by the Hamilton Project, an economic policy project on whose advisory council I serve, reviewed 23 studies of the impact of tax-rate changes on the propensity to work and found that most of them concluded there was no meaningful effect. Tax expenditure reductions, on the other hand, will not raise nearly the revenues needed for sufficient deficit reduction without increasing taxes on the middle class significantly and are likely to disrupt important social and economic goals, though many economists don’t acknowledge that.

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I thought the president was open to cutting back the charitable deduction to 80%? He did say it wouldn't affect contributions.

Posted by: Sandy P. | Nov 14, 2012 6:52:00 AM

I understand why he raised taxes. This will be good in the long run.

Posted by: Stephen Dent | Nov 14, 2012 7:32:33 AM

Rubin has it right. The upper-middle class is about to get zapped. They are a those who make between 100k and up to 200K or 250K per year and they are nobody's constituency. They are too rich (and Republican) to be an important Democratic constituency. They are too poor to be a Republican constituency, since the GOP is run by Sheldon Adelson moneybags types.

So the "deal" comes down to limiting deductions and raising taxes on the upper middle class. In exchange, the rich keep a favorable capital gains tax rate.

Pundits for the big newspapers stroke their chins and write articles about how statemenlike bi-partisan minded politicians make tough choices for the good of the country.

Posted by: jimharper | Nov 14, 2012 12:03:39 PM

Oh, so now Romney's tax ideas are suddenly good.

Posted by: Woody | Nov 14, 2012 8:02:14 PM

Romney for Treasury!

Posted by: michael livingston | Nov 15, 2012 3:01:00 AM

Politics dictates total silence when your opponent has a good idea and screams of outrage when he has a bad idea. The usual suspects were largely silent on the deduction cap proposal during the campaign. That was telling.

Posted by: AMTbuff | Nov 16, 2012 4:22:59 PM