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Ineffectual Taxes
Democrats won’t be able to find the revenue they need from closing “loopholes for the rich.”

Copies of Obama's 2014 budget at the Government Printing Office

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The Senate can propose to close loopholes that exclusively benefit the wealthy, and they can propose tax hikes that raise lots of new revenue — but they’re not the same thing.

Our tax system certainly does allow wealthy Americans to reduce their tax liability more than middle-class Americans can, but that’s because the former pay more in taxes, at higher rates. There are deductions that benefit high-income earners in particular quite generously — the mortgage-interest tax deduction, municipal-bond exemptions, state-and-local-tax deductions, retirement-savings preferences — but these don’t apply only to wealthy Americans, and they’re so popular that no recent presidential campaign or proposed congressional budget has suggested eliminating them entirely.

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The realistic way to raise revenue via deductions is by diminishing the extent to which wealthy Americans can reduce their tax liability broadly, rather than by eliminating specific deductions. The Senate’s document acknowledges this and suggests three ways it can be done. Unfortunately, none of these options can conceivably raise $975 billion from Americans making more than $250,000.

One of the Senate’s ideas, reducing the value of itemized deductions high-income Americans can take to 28 percent (that is, each $100 in deductions could reduce a tax bill by no more than $28, even for a taxpayer who pays the top federal rate of 39.6 percent), has already appeared in some of the president’s budgets. The Tax Policy Center estimated that a 28 percent deduction cap would raise $288 billion over ten years if all of the Bush tax cuts expired, and just $164 billion if they were all extended — since they expired for income over $400,000, call it $200-odd billion, or not even a quarter of what the Senate budget needs.

The president’s budget proposal last year had a more aggressive version of this, which would have gone beyond limiting itemized deductions and taxed wealthy Americans on many things that are traditionally tax exempt, such as health insurance and retirement savings. The White House estimates that this would raise $584 billion, a little over half of what the Senate needs (the true number would actually be a bit lower, because tax rates haven’t been increased as much as the Obama budget assumed).



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