Limit Deductions, Lower Rates
About the Policy
Tax rates can only be responsibly reduced by eliminating or capping some of the Big Six tax expenditures, which according to the Congressional Joint Committee on Taxation, will cost almost $750 billion annually by 2018:
• Charitable deductions $50.1 billion
• State, local and personal property tax $71.7 billion
• Mortgage interest and residential property tax $130.2 billion
• Employer-provided health care $159.6 billion
• Keogh, defined benefit and defined contribution plans $202.7 billion
• Reduced rates on capital gains (including home sales) and dividends $134.8 billion
One of the most compelling ideas to limit tax expenditures comes from Harvard professor Martin Feldstein. He suggests capping the reduction in tax liabilities that people can get from these tax expenditures to a certain percentage of income. This approach would significantly simplify tax filing as many taxpayers would shift from itemizing deductions to using a standard deduction.
Feldstein also suggests small exceptions to this cap, such as retaining the charitable contribution deduction and exempting the first $8,000 of employer paid health insurance premiums. Feldstein’s approach could avoid a politically fraught fight in Congress over which specific tax expenditures to keep, reduce or eliminate.
Polling data derived from three national surveys conducted by Cohen Research Group in February and March 2016. Each survey had a sample size of at least 1,000 registered voters with a margin of error of +/- 3.1%
“The tax code is like a garden. Without regular attention, it grows weeds that will soon overwhelm the plants and flowers. Unfortunately, no serious weeding has been done to the tax code since 1986. In the meantime, many new plants and flowers have been added without regard to the overall aesthetic of the garden. The result today is an overgrown mess. There is a desperate need to pull the weeds, cut away the brush, and rethink some of the plantings to restore order, beauty, and functionality to the garden.” - Bruce Bartlett.
In the interest of weeding the overgrown garden that is the United States tax code, the next president and Congress should decrease the number of deductions and exemptions in the tax code, and use the extra revenue to lower rates.
Congress has made over 15,000 changes to the tax code since the last major overhaul in 1986. This has made the code extremely complex. So complex, that the average American spends 13 hours a year trying to comply with it.
Because the tax code is so complex, people have radically different tax burdens depending on where they live, how they make their money and in what industry they work.
This complexity is largely driven by the number of tax expenditures - effectively government spending through the tax code. Rather than the government writing a check to help you pay down your mortgage, there is a tax expenditure that allows you to deduct interest payments.
To give you a sense of the scale of tax expenditures, the total amount of money the federal government brought in from income taxes in 2015 was $1.4 trillion. The number of tax expenditures? $1.2 trillion.
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