海角大神

It鈥檚 a proposal that has come up over and over again in President Obama鈥檚 budget, and one that I hope will come up yet again.聽 In my column in today鈥檚 Tax Notes, I remind readers that this is a great idea whose time has (been overdue to) come: the proposal to limit itemized deductions鈥搕o either 28 percent (the President鈥檚 version) or 15 percent (the more aggressive version suggested by CBO鈥檚 budget options volume). I like it because it鈥檚 a proposal to raise a lot of revenue (and reduce the deficit), yet by reducing a large tax expenditure in a progressive way.

How much revenue would the proposal likely raise?聽 A lot.聽 I refer to CBO estimates:

A lot of people get confused about this proposal, thinking that it eliminates the tax subsidy for households above the limiting bracket, but it does far from that.聽 It only limits the size of the subsidy so that the richest households don鈥檛 get the biggest subsidies per level of the subsidized activities (in both percentage terms and dollar terms), which makes the proposal a very 鈥減rogressive鈥� way to reduce a (huge) tax expenditure.聽 Right now the subsidy is a regressive one, because for any given level of subsidized activity, higher-bracket households get the biggest subsidies.聽 I constructed the table above to make clearer how that upside-down subsidy works, and how the limit would level at least part of it鈥搕he upper end鈥搊ut.聽 These proposals would not get rid of the regressivity below the limiting bracket, however, which could only be achieved if we went all the way to converting the deduction to a (refundable) credit.聽 Ideally, I would like to see all deductions converted to credits, but limiting deductions to 28 or 15 percent is a good step along that policy path.

And to counter arguments that this would kill the economic activities currently subsidized by the (full) itemized deduction, well, the evidence is actually very inconclusive about how much this tax subsidy actually makes a difference in the level of the subsidized activities (charitable giving, borrowing for homeownership), because it is always difficult to distinguish between real behavioral responses versus tax-strategic ones.聽 Often these tax subsidies just reward behavior rather than influence it, or they encourage something that is not quite the lofty social goal that policymakers had in mind.聽 As I point out in my column:

So I put out my column as my strong endorsement of this proposal. The bottom line is that this is a way to raise substantial revenue from only higher-income households and would actually improve economic efficiency (reduce the distortions caused by the tax subsidies).聽 It鈥檚 a base-broadening, revenue-raising, deficit-reducing, yet government-shrinking proposal.聽 It鈥檚 consistent with the fiscal policy goals of both Democrats and Republicans.聽 It would also be a piece of cake to implement, unlike other base-broadening proposals that have similar economic advantages.聽 Why don鈥檛 we just do it, finally?!!