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No Easy Exclusions in Tax Reform



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As the debate over tax reform and revenue increases has developed, Mitt Romney’s suggestion to raise taxes (on the rich, essentially) with a cap on itemized deductions has gained some traction. The Tax Policy Center has assessed the idea at a few different levels, and the amount of revenue you can raise is really quite substantial: A $25,000 cap could raise about $1.2 trillion over the next ten years, which is substantially more than the president’s proposal to let the Bush tax cuts for high-income earners would raise. (The president also has a plan to limit the value of deductions for those earning over $250,000 by capping the value of these deductions at 28 percent, down the 30 or so percent those taxpayers would otherwise get; this raises, according to the president’s budget, $584 billion over ten years.)

One of the problems with a cap like that, however, is that it would dramatically alter the incentives for wealthy Americans to give generously to charity. While political conservatives are understandably wary of government’s using tax policy to encourage certain activities, the charitable tax deduction has a fairly simple defense to recommend it: Americans, especially wealthy ones, are generous partly because tax policy has made it a really useful way to reduce their tax liabilities, and that generosity is a lot of the reason why American civil society flourishes. Someone’s got to pay for the little platoons, basically.

Yuval Levin has written a lot for NR about this president’s efforts to remake America as a “hollow republic“; it seems like the wrong time for conservatives to propose diverting funds Americans might send to charity to the federal government instead.

But unfortunately if unsurprisingly, exempting the charitable deduction from the cap significantly reduces the revenue the cap can be expected to raise, by a third or more (the higher the cap, the bigger the relative losses of exempting the charitable deduction). The chart below tells the story:


The moral here is that tax reform is hardly a free lunch — the president hates accelerated depreciation for corporate jets and the Right hates tax credits for solar panels, but they’re not the really big expenditures in our tax code. However, despite the revenue lost by excluding the charitable deduction, one fact to recommend the policy is that, obviously, no one is too worried about the distortionary effects of Americans’ giving too much to charity, or less so, you assume than we should be about inflating the housing market or accruing unnecessary health-care costs.



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