An Alternative to Romney’s Proposed Cap on Individual TE Benefits

by Reihan Salam

While thinking through Romney’s tentative call for a (really generous, if I’m reading it correctly, which I might not be) cap on individual tax expenditure benefits, I was reminded of Thomas Miller’s somewhat idiosyncratic but increasingly plausible call for a fixed-percentage tax credit for itemized deductions.

The political appeal of Romney’s cap is that it wouldn’t target any discrete deductions. Miller’s proposal is arguably even more attractive, as it constrains the value of itemized deductions for high-earners while raising their value for less-affluent households:

A better balance would involve setting a single rate for such deductions, raising the deduction rate for lower-income taxpayers and lowering it for higher-income ones, until they meet at a revenue-neutral level—equivalent to a fixed-percentage tax credit for such favored expenditures that provides the same proportional “pre-tax discount” for all purchasers. 

Miller acknowledges that his proposal wouldn’t address all problems created by our current tax code — but he does argue that it would have significant benefits, particularly in curbing health expenditures:

Of course, nothing short of completely eliminating the tax exclusion for employer-sponsored group health insurance, and related tax subsidies for other types of healthcare purchases, would remove all of the inefficiencies and distortions in health spending created and sustained by the current tax code. Nor does capping the rate at which health spending is subsidized by taxpayers set a ceiling on the absolute amount that one might receive in open-ended tax benefits (i.e., spend more on expensive insurance packages and receive larger tax subsidies). But the issue of a maximum per-capita or per-family cap on health tax subsidies could be addressed separately, along with offsetting reductions in marginal income tax rates across the board. And lowering the maximum rate at which health insurance spending can be tax-subsidized still would reduce the incentives of the most influential voices in employers’ health benefits decisions—higher-income workers and proprietors—to seek more comprehensive and expensive health insurance options.

I can’t imagine that we’re going to be talking much about ideas like this one in the run-up to the election. But if the Bush-era tax cuts expire at the end of this year, the tax reform conversation will soon kick into high-gear.