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Tuesday, December 18, 2012

WSJ: Of Liberals and Tax Loopholes

Wall Street Journal editorial:  Of Liberals and Loopholes:  The Current Tax Code Favors High-Tax States:

WSJ Chart 2One post-election budget surprise has been President Obama's resistance to John Boehner's proposal to get $800 billion in new revenue by closing tax loopholes. Here's one likely reason: the high tax rates of his blue-state Democratic brethren.

One of Mr. Boehner's ideas, taking a cue from Mitt Romney, would impose a limit on annual deductions. During the campaign Mr. Romney suggested a range for a deduction cap, anywhere from $17,000 to $50,000 a year, and many liberal pundits praised the idea on equity grounds.  

Since the affluent tend to itemize their deductions more than do average taxpayers, and since the affluent pay higher marginal tax rates, they tend to benefit more from deductions. Ergo, limit deductions and you raise the effective tax rate (not the marginal rate) of the affluent. (The effective tax rate is the share of total income paid in taxes, while the marginal rate is the tax on the next dollar earned.) Such a reform would help tax efficiency and equity, and the economy would benefit from fewer investment distortions.

But suddenly liberals are having second thoughts, and our guess is that this is because residents of high-tax Democratic-run states are about twice as likely to take advantage of tax loopholes as taxpayers in low-tax states. For example, 44% of Connecticut filers itemize their deductions, but only some 21% of North and South Dakota residents do.

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Comments

Today's federal government sees its mission as helping equalize outcomes for the disadvantaged. If you are a high-income taxpayer, living in a high-tax state is definitely a disadvantage. The state tax deduction is the federal government's way of helping.

Perhaps there's a compromise here if Congress would simply reclassify state and local taxes as theft losses, deductible in excess of a floor amount.

Posted by: AMTbuff | Dec 18, 2012 2:12:00 PM

I am really getting disappointed in the thinking of those at the WSJ. First the cost of living, housing and property taxes are very high in the coastal blue states therefore they take deductions....also thats where the high paying jobs are......The red states are in the south and the midwest where housing is low, job pay tends to be lower.....So how do you cap deductions and be fair to the total US? I think it is a great idea but based on fairness it is hard to rationalize. I understand one can move but you can't move the ocean to the midwest. So why not get rid of all deductions and also have the same rate for all income....would that be more fair....as WSJ does not want to tax dividends and cap gains at a higher rate although that benefit is used in the blue states more than the red states...so lets go that way...

Posted by: Sid | Dec 18, 2012 3:26:14 PM

Why does the WSJ refer to specifically allowed itemized deductions as 'loopholes'? I always thought a 'loophole' was a tax saving device that had not been intended by Congress.

Posted by: eli bortman | Dec 19, 2012 8:24:33 AM

The better definition of "tax loophole" is a deduction that someone else can take advantage of but you cannot.

Posted by: TexEcon | Dec 19, 2012 11:00:11 AM