Mitt Romney’s idea for capping individuals’ tax deductions at $17,000 would impose a burden that would fall hardest on the wealthiest taxpayers, who make the most use of the breaks.
The Republican presidential nominee suggested capping deductions this week as an option to help pay for his proposed 20 percent cut in income tax rates and elimination of the alternative minimum tax. The cap would be one piece of a three-part concept for broadening the tax base that would also limit personal exemptions and the tax break for employer-sponsored health insurance, said a campaign aide, who spoke on condition of anonymity to discuss the policy options in more detail.
“This is targeting high-income people and would hit them pretty hard,” said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center in Washington.
The effects of such a cap would vary greatly depending on details that Romney didn’t include when he floated the idea. He didn’t say how it might apply to tax breaks that aren’t deductions, such as the child tax credit. The former Massachusetts governor also didn’t say whether the $17,000 cap would apply per individual or per married couple.
The aide said yesterday that the deduction ceiling would be part of a three-pronged set of limits on tax breaks. The $17,000 cap would include deductions and credits, said the aide. Among the undetermined issues is how to handle the fact that a $1,000 credit, which is a subtraction from a tax bill, is different from a $1,000 deduction, which is a subtraction from income.
A second ceiling would apply to personal exemptions and a third cap would apply to the health-care exclusion.
The amount and details of the limits could be changed to meet Romney’s targets for revenue and distribution of the tax burden. The aide emphasized that the three-cap idea is only one option being considered.
One way to limit deductions “would be to have a single number,” Romney said in last night’s debate with President Barack Obama.
“Make up a number, $25,000, $50,000,” the Republican said. “Anybody can have deductions up to that amount. And then that number disappears for high-income people.”
About 30 percent of taxpayers itemized their deductions in 2011, according to a Tax Policy Center estimate. Of that group, fewer than one-third deduct more than $25,000.
Almost all of the top 1 percent of taxpayers itemize their deductions, and those itemizers average $173,670 in deductions. More than three-quarters of those tax filers deduct more than $50,000.
“Governor Romney’s tax reform plan will jump-start economic growth, cut the tax burden on the middle class, and lower tax rates across-the-board,” Amanda Henneberg, a spokeswoman for the campaign, said in a statement. “He will pursue revenue and distributional-neutrality in reforming the tax code. There are a range of policy options, Governor Romney referenced one illustrative example, to achieve these goals.”
Obama has been criticizing Romney for not spelling out details of his tax proposal. He has maintained that Romney’s plan would mean a shift in the tax burden from top earners to the middle class, though Romney has promised that avoiding such a change would be his top priority.
‘He’s Been Asked’
“He’s been asked over 100 times how you would close those deductions and loopholes and he hasn’t been able to identify them,” Obama said during the debate with Romney.
Ben Ginsberg, the Romney’s campaign legal counsel, said at a Politico Live 2012 debate event in Denver yesterday that Romney will provide more details “in the next five weeks.”
By itself, a deduction cap probably wouldn’t raise enough money to offset the cost of the tax-rate cuts Romney is proposing and prevent the tax burden from shifting from top earners to others.
In an August paper, the Tax Policy Center found that almost all tax breaks for annual income exceeding $200,000 would have to be eliminated to offset the rate cuts for that group.
Romney’s deduction cap alone would fall short of that mark, because it would allow some itemized deductions. Romney said there could be a lower cap on deductions for higher-income households. Many tax breaks also don’t take the form of deductions.
Won’t Solve Problem
“This by itself will not solve the problem,” Williams said.
For individual tax filers, the effect would differ depending on their financial situations. The heaviest users of tax breaks would pay more. Others would benefit more from the 20 percent rate cuts, even if they are losing deductions.
“My view is that we ought to provide tax relief to people in the middle class,” Romney said during the debate last night. “But I’m not going to reduce the share of taxes paid by high-income people.”
The largest deductions in the current tax code are those for charitable contributions, home-mortgage interest and state and local taxes.
Capping the total of itemized deductions would effectively limit the benefits of those tax breaks. The standard deduction, used by tax filers whose deductions don’t exceed that level, is $11,900 for a married couple in 2012.
Romney’s idea echoes a proposal from Martin Feldstein, a Harvard University economist who advises him. Feldstein has proposed capping deductions not at a flat dollar amount but as a percentage of adjusted gross income.
About 80 percent of the benefits of deductions go to the top 20 percent of taxpayers, and about one-quarter of the benefits go to the top 1 percent, Williams said.
Obama has proposed caps on itemized deductions paired with tax rate increases, not rate cuts. Obama’s plan would limit the benefits of deductions, credits and other tax breaks of individuals making more than $200,000 and married couples making more than $250,000 to a 28 percent rate while also raising the top tax rate to 39.6 percent from 35 percent. That plan hasn’t advanced in Congress.
The Obama campaign said Romney’s suggestion of a cap on deductions means he would constrain tax breaks used by millions of middle-income Americans and noted that many families deduct more than $17,000.
Romney “is now admitting that middle-class tax increases on housing, health care and charitable deductions are on the table,” Adam Fetcher, a spokesman for Obama, said in an e-mailed statement yesterday. “But regardless of the twists and turns, Governor Romney has never been able to explain how he will pay for his $5 trillion tax plan without raising middle-class taxes.”