Might an idea from Mitt Romney save US from 'fiscal cliff'?

Might an idea from Mitt Romney keep the United States from going over the "fiscal cliff"? That’s a topic that’s rattling around Washington’s policy blogosphere at the moment.

At first glance this seems unlikely – Democrats often accused Mr. Romney of making vague assertions instead of actual policy proposals, particularly on fiscal issues. But at one point the GOP nominee did float the notion of a cap on income tax deductions. Some experts now say such a limit could be an important element in a deficit-reduction agreement palatable to both parties.

“A cap just might be a Republican-friendly way to get what Democrats want,” writes Matthew O’Brien, associate editor for business and economics at The Atlantic.

If you recall, during the campaign the cap thing came up in the context of how to pay for Romney’s proposed across-the-board 20 percent tax rate reduction. The former Massachusetts governor vowed that this reduction wouldn’t cost the US Treasury anything, in part because he’d eliminate deductions and close loopholes to keep tax revenue up.

But he wouldn’t say which deductions in particular would get whacked – probably because many are popular, such as the mortgage interest deduction and the deduction for charitable donations. Eventually, he said that perhaps people would be allowed a certain dollar figure of deductions they could take as they choose, say $28,000.

For Democrats, the appeal of this idea is twofold. One, it’s a tax increase on the wealthy that doesn’t depend on actually increasing the tax rate, which remains a red flag for many Republicans. Two, it’s got tremendous mathematical power. A hard cap on deductions would hit the wealthy much, much harder than it would hit the middle class, or even the upper middle class.

Let’s raise the cap to $50,000, just to be generous. As Mr. O’Brien points out, this would raise $59 billion in 2015 if tax rates otherwise remain the same. Fully 73 percent of this revenue would come from households whose income exceeds $1 million. Households making less than $200,000 would pay essentially zilch in extra bucks to Uncle Sam.

Wow! Way to zap the car-elevator set, Mitt. And it’s a Republican idea. So how could the GOP now object?

We’ll tell you how – by objecting. This is a tax hike in sheep’s clothing, and the question is whether the GOP congressional leadership will treat it as such. Yes, conservative William Kristol over at the Weekly Standard on Sunday said it’s time for Republicans to give on the question of higher taxes on the wealthy. But not everyone in the party is willing to make that sort of retreat.

House Speaker John Boehner (R) of Ohio has said he’s still opposed to anybody’s tax rates going up. But he has suggested he’s open to new revenues through “tax reform.” Would a deduction cap qualify here? That’s not yet clear, and it’s one of the most intriguing questions hanging over the fiscal cliff negotiations, which begin in earnest this week.

Furthermore, President Obama proposed a version of a deduction cap in 2011 to help pay for his American Jobs Act, which Congress didn’t pass. At the time, institutions that benefit from charitable deductions, such as universities, art museums, and so forth, objected strenuously to the limit, since they depend heavily on millionaires’ contributions. If charity isn’t excluded from a cap proposal, expect to see this opposition rise up again.

One last point: Any cap on deductions would have to be part of a larger deficit-reduction package. It wouldn’t raise nearly enough money to solve the problem by itself. Mr. Obama’s cap by itself would have generated $164 billion over 10 years, points out Suzy Khimm on The Washington Post’s WonkBlog Tuesday. In contrast, allowing the Bush-era tax reductions to expire for those making more than $250,000 would generate a whopping $1 trillion over the same time period.