How to Turn the Deduction Cap into a Middle-Income Tax Cut

by Reihan Salam

One of the main ways the Obama administration proposes to raise tax revenue in its fiscal year 2014 budget is by imposing a 28 percent cap on the value of itemized deductions, a measure that is expected to raise $529 billion over the next decade. The president and his allies have been touting this approach, which also appeared in the Obama administration fiscal year 2013 budget, for some time, as it raises taxes on high-earners while preserving a marginal incentive to donate to charity. In 2011, Thomas Miller of the American Enterprise Institute argued that while there is some merit to the proposal, it would be greatly improved if we shifted to fixed-percentage tax credits for itemized deductions. So while the value of itemized deductions for households in the 28, 33, 35, and 39.6 percent tax brackets would be limited to 28 (or X) percent, the value of itemized deductions for households in the 10, 15, and 25 percent tax brackets would be increased to 28 (or X) percent, with X being some revenue-neutral number. Miller acknowledges that while a fixed-percentage tax credit isn’t an ideal vision for tax reform, it would “signal some sensitivity to fairness concerns.”

Republicans who are reluctant to back a substantial revenue increase yet who believe that easing the tax burden on middle-income households is good politics and good policy would be well-advised to embrace Miller’s fixed-percentage tax credit concept.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.