Tuesday, October 2, 2012

Capping Deductions Isn't a Cure-All

How do you get tax reform when everyone believes that lower rates and fewer tax expenditures is a good overall policy, but no one is willing to give up their tax breaks? Mitt Romney is floating a plan to just put an overall cap on deductions. Matt Yglesias endorses it as a "clever plan" and says, "The big advantage is that since no particular deduction is eliminated, you don't reap the fury of the impacted interest groups in the same way." Ezra Klein is also positive. And I am too, but note the questions Klein asks:
This leaves a lot of unanswered questions. For instance, which deductions are covered in the $17,000 cap? Is it only the deductions he mentioned? Is it all itemized deductions? Is the state and local tax deduction in there? Is it really going to include the exclusion for employer-based health care? Is the cap in addition to, or instead of, the standard deduction? Do individual taxpayers have a lower cap than families? 
See, that's the problem. The first thing you're going to get if this goes to Ways and Means is a whole bunch of very virtuous lobbies insisting that they get carved out from it. What, you're going to make it so that if I give lots of charity I don't get the mortgage deduction that my cheapskate neighbor can take? And if Congress (and Romney) start giving in on one deduction, then the floodgates open for everyone else to exempt their deduction from the deal.

So does that make it not worth trying? Maybe, maybe not. What's far more important (as Greg Sargent flagged yesterday) is that in reality what we're likely to get from Romney is big tax cuts with token deduction elimination. But when it comes to doing actual tax reform, there's really no way to get around the fact that there are going to be winners and losers, and the losers are going to make an awful lot of noise. Doesn't make it impossible -- and I'm open to the idea that capping deductions would make it slightly easier -- but no one should fool themselves about how difficult it would be, or that there's a magic formula that can make it all work out.

8 comments:

  1. This is not a new idea. We've had caps and limitations on itemized deductions in place for awhile. And yes, there have been exceptions put into place as well. Most particularly the exceptions did not apply to estates and trusts and did not apply to investment interest expense. Gee, I wonder why those were exempted? The limitation was actually fairly progressive - it was based on your overally AGI, so the higher your AGI the greater the limition. To have just a flat cap that applies at all income levels is certain not going to be as progressive.

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  2. Are tax expenditures from lower capital gains rates included in reaching the cap? Didn't think so, pass.

    Putting aside the political science to focus on the politics, I read about the centrists in the Senate working on a Grand Bargain-ish deal for the lame duck session. Of course the Republicans say you can't raise one penny of taxes, so it's shaping up as something like $3 of spending cuts for every $1 of additional tax 'revenue'.

    Which is another way of saying that they think they can reformulate the tax tables and scrape enough loopholes off the books to both lower tax rates, and magically increase tax revenues to meet the targets in the deal.

    PIG IN A POKE, sez I. If they can't get the GOP to agree to some tax hikes in the face of the Bush cuts expiring *and the indiscriminate defense cuts from the sequester, the Congressional Dems may as well resign en masse - you'll never get them to go for raising taxes in our collective lifetimes.

    Like a GOP-chaired Ways & Means Committee is going to write anything that hurts their hedge-fund base? I'd much rather fall over the so-called fiscal cliff, and work out a deal with the new Congress from the re-established Clinton-era baseline.

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  3. To be a bad commenter and go OT from the OP, because I didn't get the chance to comment on the actual post I'm responding to, because sometimes it takes time for thoughts to percolate:

    On commenting etiquette JB links approvingly to Alan Jacobs, who wholeheartedly endorses a post by John Scalzi called "How to be a good commenter". Some of what he says is obviously correct: you shouldn't make comments that have no content or value, you shouldn't be nasty or mean-spirited, you should make good arguments that you can support. Fine. And he's totally right that it often makes sense to drop a thread instea of continue. Great. But some of what he says, while it may be etiquette for commenting on a blog with a huge comments section, I would be distressed to see adopted here. To wit,

    (1) that it's rude to comment if you can't answer "yes" to the questions "Is what I have to say actually on topic? ... Does what I write actually stay on topic?" In a little heimishe set of commenters, many of whom readers get to know some over the course of months and years of posts, I have to say, I often learn at least as much from the twists and turns conversations take as I do from where we started. A lot of people here are really knowledgeable, insightful, articulate, etc. They have the honesty to acknowledge others' points (without necessarily accepting them), the humility to admit what they aren't sure of, and the integrity to make it a conversation and not a competition. They also, often, have some overarching principles or some constant reference points that they will start from and return to. When a conversation on a particular topic touches on a broader issue, those things come up, and yes, again and again, and particular areas of expertise and commitment, and particular interests and emphases. I want to hear what they think is worth saying in response to a post even if it's not very closely to the stuff (worth saying) that JB has posted about.

    (2) that it's always rude to just comment in support without adding anything. It's lonely out here, not knowing how you're coming across. Commenters can learn from feedback too.

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    Replies
    1. Agree with both of those, with the caveat that one has to have a sense of the place. Every good comments section has it's own rhythm, and you have to get to know it in order to have a sense of when a digression is terrific and when it's on the disruptive side. At least, IMO.

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    2. Right right right! Clearly the topic of the OP's post is not an indifferent matter (unless it's an open thread); clearly there are ways and ways of going OT. I only meant that other commenters' (including the OP's) replies are generally enough to establish and express the community norms, without a stricter rule. Err on the side of staying on topic, for sure. But don't keep mum because of it.

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  4. Erratum: that should be "those things come up, ... and so do their particular areas of" &c.

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  5. We can pull the string on a doll to make it say, "It'll never pass," and that doll would be more accurate than 98 percent of professional pundits.

    But, hey, at least it is an interesting idea worthy of debate and study.

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  6. "How do you get tax reform when everyone* believes that lower rates and fewer tax expenditures is a good overall policy, but no one is willing to give up their tax breaks?"

    * For definitions of "everyone" that don't include... everyone. For instance I don't believe lower rates and fewer tax expenditures is good overall policy. More and higher marginal income tax rates and fewer tax expenditures are my preferences and I'm not alone.

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