Friday, February 22, 2013
Putting a cap on tax expenditures—those features of the tax code that are a substitute for direct government spending—can break the current fiscal impasse and prevent the dangerous explosion of the national debt. If a cap is combined with entitlement reforms, the government will also be able to reduce tax rates and increase some spending to accelerate the economic recovery. ...
Limiting the tax savings from all deductions and the two major tax exclusions to 2% of an individual's adjusted gross income would reduce the deficit in 2013 by $220 billion. This 2% cap does not refer to the amounts of the deductions and exclusions but to the tax saving. This means that for someone taxed at a 25% marginal tax rate, the 2% cap would limit deductions and exclusions to 8% of that individual's adjusted gross income.
The 2% cap could also be modified to retain the existing deduction for all charitable contributions and to allow employees to exclude the first $8,000 of employer-paid health-insurance premiums from the cap. This would still reduce the current year's deficit by $141 billion. That translates to about a $2.1 trillion reduction in the national debt over the next decade.
Higher tax rates, in short, are not necessary in order to raise substantial revenue. Indeed, some of the $2.1 trillion could be used to reduce current tax rates and promote growth.