Tuesday, December 18, 2012
Wall Street Journal editorial: Of Liberals and Loopholes: The Current Tax Code Favors High-Tax States:
One 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.