Friday, December 14, 2012
Although tax deduction caps are likely to be enacted as part of any political compromise before the end of the year, rate changes are far more transparent and ought to be a significant component of any reform. The White House and Republican congressional leaders clearly are divided on the prospect of raising or lowering tax rates.
With split partisan control of federal political offices, it seems unlikely that any significant modification to the current rate structure is in the cards. However, there appears to be bipartisan support for limitations on deductions for high-income individuals. Although broadening the tax base by making more income subject to tax (by, e.g., limiting deductions) is a sound and effective revenue raising maneuver, the impact on individual taxpayers is obscured compared to rate changes.
It is not surprising, then, that politicians can reach compromises on deduction limitations rather than rates. The simple fact is that rate changes and their concomitant effects are too transparent for partisans to concede. Generally speaking, people understand the significance of their top marginal tax rates, but are less likely to thoroughly analyze the consequences of reduced deductions. ...
Congress's ability to compromise on less transparent tax reform, but not tax rates, suggests that maybe taxpayers aren't intended to understand the consequences of such reform.
(Hat Tip: Francine Lipman.)