A Cap for Deductions?

by Mario Rizzo

The New York Times reports today that the Democrats are searching for a way to get additional tax revenue from “the rich” in a way that might garner Republican support. So they are bringing up an idea suggested by Mitt Romney in the presidential campaign to limit deductions to a specified aggregate amount.

How such a proposal would work out in practice depends on the details. The first point is the status of the charitable contribution deduction. Is that included in the limit or not? If it is, then one should expect charitable contributions, especially the large gifts, to fall. Beyond the political reprecussions, there are substantive issues. In a world so dominated by the “compulsory charity” of the state do we want to reduce private-based alternatives? This is a tough issue.

On the other hand, if we exclude charitable deductions (as some “Democratic centrists” — New York Times‘s label —  want), then we have opened the door to exception-making and special interest pleading. What about the home-mortgage deduction? I can see it now,”At a time when the housing sector is just starting to get on its feet…” And “the state of the housing sector has important macro-economic effects.” And so forth…

Of course, this would be an increase in effective marginal rates since as income rises you must pay the old rate (let us say) on a greater amount of your income.

So this is what the election was all about? I am afraid so.