Another possibility, floated by Mitt Romney during the 2012 campaign, is a cap on the dollar value of itemized deductions. This could raise even more than the revenue needed — a $25,000 cap would mean $1.2 trillion more in taxes over the next ten years, but more than 30 percent of that would come from people making under $250,000. If you eliminate the cap for everyone below that threshold, and then adjust it so that people earning just over $250,000 don’t face a huge cliff, the total is down to $650 billion according to the White House’s own estimate.
The last option is a cap on tax preferences as a percentage of income. Harvard economics professor Martin Feldstein has been floating such an idea for a while now, proposing that all tax expenditures and the exemption for health insurance be limited to 2 percent of taxpayers’ incomes. That raises $2.1 trillion over the next ten years, but most of it comes from the middle class. Limit it to those making over $250,000, and you get only about $550 billion.
None of these estimates, by the way, would preserve the existing incentives for charitable giving. If a taxpayer can hit his deduction limit through his normal spending habits — his mortgage, state taxes, and so on — the charity deduction will no longer be a reason to give. Most politicians say they would like to preserve this incentive, but exempting charitable giving reduces the above estimates by up to one-third.
To sum up this issue, I would quote a White House statement, from economic advisers Gene Sperling and Jason Furman:
Plausible tax expenditure limitations that protect middle-class families and incentives to give to charity would raise far less revenue from the well off than is needed for a major budget agreement. A budget framework that raises only these amounts from high-income tax deductions while committing to no rate increases on high-income Americans would inevitably force any tax reform designed to further reduce the deficit to raise taxes on middle-class families simply to preserve lower rates for the most fortunate.
Their statement (about a Republican fiscal-cliff offer) happens to describe the Senate’s efforts quite well: Democrats would like a “major budget agreement” that largely preserves rapid growth in entitlement and discretionary spending, and the amount of revenue necessary to do that cannot be raised solely from eliminating deductions for high-income earners.