Deficit talks will test the GOP focus on tax rates

Associated Press Modified: November 12, 2012 at 4:45 pm •  Published: November 12, 2012

Republican presidential nominee Mitt Romney briefly suggested limiting itemized deductions to $17,000 a year. The plan would have raised $1.7 trillion over the next decade, according to the non-partisan Tax Policy Center. But it would have increased taxes on millions of people, including about 27 percent of households making $50,000 to $75,000 a year.

Now, GOP congressional leaders are suggesting that limits to itemized deductions might be acceptable. But they have offered few details.

The tax code includes "all kinds of deductions, some of which make sense, others don't," House Speaker John Boehner, R-Ohio, said last week. "By lowering rates and cleaning up the tax code, we know that we're going to get more economic growth."

Van Hollen said Democrats will demand specifics.

U.S. taxpayers enjoy about $1.2 trillion in tax breaks each year, including credits, deductions and exemptions that lower their federal tax bills. More than a quarter of those tax breaks go to households making above $1 million. About a third of them go to households making more than $500,000, according to the Tax Policy Center.

Lawmakers could raise a significant amount of money by reducing or eliminating some tax breaks for the wealthy — without raising tax rates. But tax experts warn that it wouldn't be easy because all of those tax breaks are important to powerful interest groups.

William Gale, a former economic adviser to President George H.W. Bush, notes that while tax rates have gone up and down over the years, federal tax breaks for owning a home, donating to charity, raising children and paying local taxes have endured.

Why? If lawmakers try to reduce tax breaks for owning a home, the housing industry complains. If they try to reduce the deduction for making a charitable donation, charities, universities and other nonprofit groups complain.

"Historically, it has never been easy, which is why those tax breaks are still in the code," said Gale, a senior fellow at the Brookings Institution.

Obama has repeatedly proposed limiting itemized tax deductions for high-income families. But Congress has largely ignored his plan, even when Democrats controlled the House and the Senate.

Currently, the top income tax rate is 35 percent on taxable income above $388,350. If a person making more than that gives $1,000 to charity, he can reduce his taxes by $350. Under Obama's plan, the same taxpayer would save only $280.

In general, economists say it is better to raise additional revenue by doing away with tax breaks rather than raising tax rates, said Roberton Williams, a senior fellow at the Tax Policy Center. Raising tax rates can be a disincentive to working harder, because the person gets to keep less of each extra dollar he earns.

Eliminating tax breaks can have other effects. Reduce the mortgage interest deduction and people will buy smaller homes, Williams said. Reduce the charitable deduction and they may donate less money.

Bob Bixby of the Concord Coalition, which advocates balanced federal budgets, said lawmakers must spell out exactly which deductions they want to trim if any deficit-reduction compromise is to occur.

"It's important for people to start talking about those by name," Bixby said, "and not just about 'closing loopholes.'"