Yesterday Mitt Romney offered a far more specific method to get out of his tax math hole than ever before, proposing a potential cap on deductions at $17,000 per person. All deductions for individual tax filers, presumably, would remain active; but once you hit $17,000 with any combination of them, you would be done.
Here’s how Romney described it:
“As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others – your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way,” he said during a visit with Denver’s FOX31. “And higher income people might have a lower number.”
The “healthcare deduction” is actually known as a tax exclusion for employer-provided health care, and not technically a deduction. You don’t file your health care expenses unless you’re self-employed. And there are plenty of other questions, like whether this replaces the standard deduction. Clearly this was off the top of Romney’s head and not fully fleshed out, though the $17,000 number seemed practiced. Perhaps we’ll hear more at the debate tonight.
One problem is that this doesn’t really get Romney out of his tax box. Remember, he wants to reduce individual rates across the board by 20%, and pay for it by removing tax expenditures like deductions, and also not have the middle class, broadly defined as anyone making under either $100,000, $200,000 or $250,000 (depending on what day it is) pay any more. This remains mathematically impossible even under this simplified deduction cap. Even zeroing out deductions above $250,000 doesn’t get you the money you need to offset the 20% drop in rates. And this doesn’t zero things out. So if rich people pay less under Romney’s plan, somebody would have to pay more. Howard Gleckman of the Tax Policy Center makes this argument in a snap analysis.
“It goes back to the same problem that we’ve raised,” says Howard Gleckman, an expert at the non-partisan Tax Policy Center, which famously concluded Romney’s tax plan would require raising taxes on middle-income earners. “He’s promised all these things and he can’t do them all. In order for him to cover the cost of his tax cut without adding to the deficit, he’d have to find a way to raise taxes on middle income people or people making less than $200,000 a year. This might do that, but without way more details than he’s providing there’s no way to know who gets hit and how much they get hit by.” […]
“This would generate a lot of revenue,” Gleckman said. “It would ask some people to pay more clearly, but whether or not it would hit the middle class depends on what you define as middle class — whether you believe someone making $199,000 is middle class.”
If you think about deductions that make their way down to the middle class, the home mortgage interest deduction and state and local taxes alone could eat up the $17,000. That leaves a lot out in the cold, so clearly their taxes would rise.
There are ways to progressively tailor something like this, however, specifically by ratcheting the deduction cap down as income rises. And those who don’t itemize, including pretty much all of the working poor who pay federal income taxes, would just get the benefit of the rate drop. Senator Pat Toomey (R-PA) proposed a deduction cap previously in a budget proposal, and while Robert Greenstein of the Center on Budget and Policy Priorities hated the overall plan, he liked the deduction cap idea for precisely this reason.
However, President Obama proposed a type of deduction cap, specifically on the percentage benefit from deductions that people earning above $250,000 a year can take. This was one of the ways his initial health care proposal was funded, and later, he tried to use that revenue-raiser to fund the American Jobs Act. And Congress basically returned it DOA. They said it would hurt charitable giving. They rejected it out of hand, Democrats and Republicans alike. And I suspect this would work the same way.
Mitt Romney by DaveLawrence8 under Creative Commons license