Republican presidential candidate Mitt Romney says he favors keeping all of the Bush-era tax cuts and then adding some more. To pay for these cuts, he would reduce or eliminate some of the tax deductions that many Americans have come to rely on. But his proposals are already facing a lot of resistance.
Romney says he wants to sharply cut income tax rates, which would mean big tax cuts for higher-income people. But he says the cuts would be revenue-neutral. They would bring in the same amount of money to the Treasury because he would also get rid of some of the deductions that fill the tax code.
"I'm looking instead to lower tax rates and limit deductions and exemptions in such a way that we have enterprises, small businesses able to keep more of their capital and at the same time simplify the code," he said last week on Fox Business News.
Tax Deductions
Economists say simplifying the tax code is a good idea because it's filled with deductions that distort the economy. Because people can write off mortgage interest on their taxes, they're encouraged to buy more expensive houses than they otherwise might.
"What broadening the tax base does is get the tax code a little bit out of the business of picking, you know, which industries or sectors should get tax preferences, and more giving it back to individuals," says Glenn Hubbard, dean of the Columbia University Business School and a Romney adviser.
Hubbard says he believes that simplifying the tax code and removing some of these distortions would be good for the economy in the long run. But doing so would be an enormous political challenge. For instance, the mortgage interest deduction has been used by some 75 million U.S. households. Getting rid of it would devastate an already-weak housing industry, says Lawrence Yun, chief economist at the National Association of Realtors.
"In every tax reform process, the mortgage interest deduction is discussed. However, at the end of the day, the elected official clearly recognizes that the mortgage interest deduction is very important for the economy, important for the middle class," he says.
Likewise, there are big deductions for charitable contributions and health insurance premiums, and any politician who tries to do away with them is likely to do battle with angry taxpayers, not to mention lobbyists. Romney has so far avoided such a backlash by steadfastly refusing to say which deductions he wants to cut.
Who's Affected?
"The underlying difficulty in analyzing all of this is he has not actually said how he would pay for all of these cuts," says William Gale of the Tax Policy Center, who co-authored a paper on Romney's tax plan.
Gale says you can't pay for Romney's tax cuts for high earners just by eliminating deductions — unless you also raise taxes on the middle class.
"When you actually look at the available tax expenditures that can be reduced, there aren't enough of them in the upper-income class categories to pay for the various tax cuts that high-income households get," he said.
The Romney campaign has criticized that report, saying it made some wrong assumptions about which deductions Romney was willing to eliminate. In reality, says Hubbard, everything is on the table.
"What he's committed to do is working with the Congress to making sure that the tax plan is both revenue-neutral and fair, that is, distributionally-neutral, and there's enough tax expenditures to do that," he says. "How you do that is something that both he and the Congress would have to decide."
Hubbard also says the Tax Policy Center report underestimates the powerful impact that broadening the tax base would have on growth. That would mean more long-term revenue for the government. It's a variation on an argument that Republicans have long made about tax cuts, and it's much in dispute among economists.
Still, there is widespread agreement that eliminating deductions would be a good idea, that it would at the very least make the tax code fairer and less confusing. The challenge lies in winning over the many millions of Americans who now benefit from the deductions and won't look kindly on efforts to change them.
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