Cut deductions to lower tax rates? Easier said than done.

A major challenge facing tax reform that reduces itemized deductions to help pay for lower tax rates is that lots of middle-income people would lose at least some benefits, Gleckman writes. 

Two interesting new papers from the Congressional Research Service highlight a major challenge faced by any tax reform that reduces itemized deductions to help pay for lower tax rates—lots of middle-income people would lose at least some benefits from scaling back those deductions.

It isn’t a new lesson, but it is one that bears repeating. For instance, a March 21 CRS paper shows that in 2010 about 40 percent of all deductions were claimed by households making between $20,000 and $100,000, with 28 percent going to those making between $50,000 and $100,000. Nearly half of tax filers making between $50,000 and $100,000 claimed deductions for mortgage interest and charitable giving, and more than half deducted state and local taxes.

Those three deductions alone represent more than two-thirds of all itemized deductions. Thus, it is hard to imagine any base-broadening, rate-cutting reform plan that doesn’t include some cuts in those preferences. And taking that step threatens to make a lot of middle-income taxpayers very unhappy. As Bruce Bartlett (who tipped me off to the CRS papers in his New York Times blog this morning) notes, this may explain why so few tax reform plans ever identify a single tax preference they would target.

Of course, higher income people disproportionately benefit from many deductions. For instance, the Tax Policy Center estimates that households making $500,000 or more represent less than 1 percent of all taxpayers. Yet, CRS estimates they claim about 15 percent of all deductions. 

But middle-income taxpayers may be more interested in what they’d lose, not in their hit relative to the wealthy.

In a May 21 paper, CRS figures that wiping out all deductions would boost effective marginal tax rates by 4.4 percentage points. The actual winners and losers, of course, can’t be identified without also looking at how any specific plan reduces rates. It is possible to redesign rates in a way that middle-income people, on average, pay the same total tax as they do now. But it isn’t easy. And even if Congress pulled it off, there would still be winners and losers within income groups.     

An important caveat: The CRS papers, written by Jane Gravelle and Sean Lowry, look only at itemized deductions. They ignore other tax preferences such as the exclusions for employer sponsored health insurance and contributions to tax-preferred savings accounts such as IRAs and 401(k)s. But as my Tax Policy Center colleagues have shown, millions of middle-income households also benefit from those preferences, further buttressing the argument that these taxpayers would face severe sticker-shock from the Great Reveal of any tax reform plan.

Like a lot of the work that my TPC colleagues have done in recent years, the CRS paper does not discredit tax reform efforts. But it does show how challenging they will be. Tax wonks won’t be surprised by the CRS findings but politicians may be. That’s why they—and you–should read the paper.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Cut deductions to lower tax rates? Easier said than done.
Read this article in
https://www.csmonitor.com/Business/Tax-VOX/2013/0528/Cut-deductions-to-lower-tax-rates-Easier-said-than-done
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe