by Richard Morrison
The Tax Foundation
Mitt Romney’s proposal to cap itemized deductions on federal income tax returns would significantly reduce the tax cut that high earning households would otherwise receive under his tax plan and would eliminate the presumption that taxes would increase on middle-income filers, according to a new analysis by the Tax Foundation.
“Governor Romney’s suggestion of a $17,000 cap for deductions should finally relieve concerns, largely unfounded to begin with, that the plan would turn out to be insufficiently progressive or end up raising taxes on middle income families,” said Tax Foundation President Scott Hodge.
Model scenarios found that the reduction in revenue from cutting individual tax rates would be substantially offset by dynamic effects of his other policy proposals. The proposed reduction in the corporate income tax rate, and lower taxes on capital gains, dividends, and estates would contribute to job growth and federal revenues, reducing the cost of the total package.
“The combination of the additional revenue from economic growth and the limitation on itemized deductions comes very close to making the plan revenue neutral,” said Tax Foundation Senior Fellow Stephen Entin. “For example, the cap on deductions reduces the plan’s static revenue losses from $338 billion to around $206 billion. The economic growth generated by the plan further reduces the revenue losses to under $14 billion. By Washington standards, this is well within the margin of error.”
While the Tax Foundation’s analysis illustrates that the tax package can indeed be made to work without raising taxes on middle income families, the limitation on deductions is a blunt tool for tax reform which does not address the merits or demerits of the different types of deductions. It is also not clear whether Congress will go along with major reductions in some types of the deductions involved. A series of spending reductions in the least valuable or most wasteful federal spending programs might be a better way to proceed.