My point here though is that I don’t think a deduction cap accomplishes any of the goals of tax reform centered around lowering rates and eliminating deductions. We now seem to be in agreement on that as far as I can tell. The “seven different pre-tax deductions” would still be on your paycheck, as would the other deductions and credits. The phaseouts would likewise still apply.

The only potential accomplishment that I see is a (modest) lowering of marginal rates. But I don’t see why that is necessarily a positive thing if the effective rates don’t change much (they would go down for some people and up for others). How many Americans have any clue what their marginal tax rate is? And what subset of those people make decisions about working more, or making deductible payments, based on that rate?

Lastly, and mostly unrelatedly, why does Romney get to go around touting a 20% tax “cut” that he claims is revenue neutral? Either he is proposing a tax cut or he is proposing revenue neutral reform. It can’t be both.

No system will ever be wholly fair, so you might as well stick with something simple. We have seven different pre-tax deductions from our paychecks, four or five different major items on Schedule A, and a handful of credits which each come with a different cap or phase-out. We can’t even calculate the tax owed without going through a page-long form on the back of Schedule D.

But are any of those three things accomplished with a deduction cap in the range of $17,000 per year?

1) the existing distortions caused by things like the mortgage interest deduction (or the arguably more problematic exclusion from income for employer provided health insurance) will nearly completely stay in place. Arguably they will completely stay in place because taxpayers / potential home buyers will not understand the impact of the deduction cap.

2) simplicity? This proposal would simply add a layer of complexity. It would be very difficult to know, in the early months of a given year, whether a particular payment will be eligible for an income tax deduction. And when it comes time to prepare one’s taxes, you would have to first enter your itemized deductions (and all the work that entails) and then check to see whether the cap impacts your results. (and then on top of that still have to work through the alternative minimum tax).

3) I don’t see how transparency is changed much here. It might even be worse if the cap applies to a bunch of households in the $150k-$300k income range while people like Romney continue to pay a 15% tax rate on nearly all of their income. Additionally, the cap would presumably not apply to ordinary and necessary business deductions, so there would still be anecdotes about small business owners taking tax deductions for cars and phones mostly acquired for personal use.

I don’t mean to say that the goals you have identified are unworthy goals. Quite the opposite actually – I think they are right on the money.

However, I don’t think the deduction cap idea materially advances any of them (unfortunately).

(1) Law of unintended consequences. Credits/deductions are frequently a ham-handed attempt to manipulate economic behavior, or to make the system “fairer” for some disadvantaged group. Yet for every inequity they resolve, two new ones are created. Could argue that tax policy contributed to the mortgage bubble.

(2) Simplicity. Shouldn’t require a college degree and a $40 computer program to file your taxes (we don’t do anything terribly unusual). These days, nobody but an expert is aware of all the possible deductions/credits out there.

(3) Transparency. Better for all if people can trust that everybody is paying their fair share. If they suspect the system is slanted to the advantage of somebody else, they get resentful.

I would like to step back and ask why you think “tax reform”, and especially tax reform centered on lowering rates while trimming deductions, is a good idea. Why do you think it’s a good idea?

Possibilities include:
1) eliminating wasteful deductions and credits that were maybe once a good idea but which are no longer worth their cost;
2) providing a more transparent income tax system so that workers can properly assess the marginal benefits and costs of earning higher wages;
3) cost savings from simplified tax filings; and
4) ?

It seems to me that the $17,000 cap on deductions, while a politically elegant way to limit deductions without battling over specific deductions, serves no practical purpose. At least it does not seem to accomplish any of the goals I’ve listed above.

Why would a tax system with marginal rates that are, say, 5% or 10% lower, coupled with even more complexity around deductions and credits, be a better tax system?

And if we are looking to have revenue neutral tax reform (which apparently everyone in Washington has agreed to), isn’t the only point to enact a system that is in some way “better”? Why else are we shuffling chairs around?

If you split out each 3rd of the middle class you learn that the lower middle is mostly untaxed at the federal level. Payroll taxes are meaningful but do not even cover the direct benefits tied to them. This leaves basically no contribution for any discretionary spending.

It is much more complicated for the middle middle and upper middle. Some like me pay almost nothing due to broad categories of the largest deductions. Childless renters who don’t provide for their own retirement are badly discriminated against by the current code.

One could quite accurately point out that a society made up exclusively of childless renters who don’t provide for their own retirement would fail within 1 generation… but rather than get into that counterproductive debate… I’ll just admit that as a group, people in the upper half of the middle class DO NOT PAY THEIR FAIR SHARE in the current system.

15,000 in retirement contributions on which my taxation is deferred into the future.

14,000 in mortgage interest on a 1st home.

12,000 health insurance deduction (half that amount if you exclude the share paid by my employer.)

8,000 worth of deductions (which are really 2k in credits multiplied by the inverse of my marginal rate.)

So I have roughly 50,000 in deductions. TFF accurately points out that I pay property taxes, sales taxes, state income taxes… but the feds get only a modest contribution from me.

In the 65 percentile of income my federal government spends 4 times what they collect from me per capita. That’s a fairly progressive system as it stands.

Everyone always wrings their hands about the deficit. “What are we going to do?” they helplessly whine. We have financed a first-world infrastructure: highways, airports, universal high school, a massive freaking eighth-wonder-of-the-world kind of army, several wars, and two large health insurance companies (Medicare and Medicaid) that for some reason only cover people who are very likely to either be sick, poor or both. We have done this for thirty years while half of our political class shrieks about how will never, regardless of justice or need or moral imperative, raise taxes. They fight to lower them whenever they can. And they have succeeded often. Americans do not pay a first world tax rate. We need to get over it, and agree as a society that we will pay what it costs to run our government. We can do it as a democracy, together- because the minute you start asking individuals everyone goes all tragedy of the commons. We need to summon the spirit of Elinor Ostrom and make her tell us how to convince the electorate to take care of ourselves… Then we can worry about the shrieking of the spin machine.

Because anything that would generate enough revenue- that includes deduction caps- to make up for the kind of tax cuts that Romney wants (let alone touches the deficit) will make lobbyists and special interests squeal in ways that would embarrass swine.

Felix: “The lack of detail was immediately seized on by the Obama campaign, which decided that…it obviously had to include the healthcare exclusion — the way in which Americans don’t pay taxes on health-insurance costs borne on their behalf by their employer.

But Romney never mentioned exclusions, only deductions. This is hair-splitting territory, but if you’re the kind of person who itemizes your deductions, you know what you’re deducting. The big ones are your state and local taxes; your charitable contributions; and your mortgage interest payments. Meanwhile, you probably don’t even know how much your employer is spending on your health insurance.”

If you have to lie that much to make Romney sound sane, Felix, you need to quit your job. It’s not good for your health.

What proportion of households itemize at all? I’d be happy enough to simply eliminate schedule A all together. The vast majority of the benefits from itemizing flow to the wealthy.