How Much Money Can You Raise by Capping Deductions?

Governor Romney has proposed roughly $5 trillion in tax cuts, but he doesn’t want to reduce overall tax revenues. He hopes to generate some revenue by boosting the economy, but even if that works, he will need trillions of dollars of “base broadeners” — i.e., offsetting tax increases. Like most politicians, he’s been vague about what those base broadeners might be. But in the past few weeks, he has discussed the idea of capping the amount of itemized deductions taxpayers can take, perhaps to $17,000, $25,000, or $50,000.

How much revenue could you raise by doing this? My colleagues at the Tax Policy Center just released some estimates of this. As noted by Bob Williams:

Eliminating all itemized deductions would yield about $2 trillion of additional revenue over ten years if we cut all rates by 20 percent and eliminate the AMT [DM: two key aspects of Romney’s tax proposal]. Capping deductions would generate less additional revenue, and the higher the cap, the smaller the gain. Limiting deductions to $17,000 would increase revenues by nearly $1.7 trillion over ten years. A $25,000 cap would yield roughly $1.3 trillion and a $50,000 cap would raise only about $760 billion.

Capping itemized deductions at $25,000 would thus produce about one-quarter of the revenue needed to offset Governor Romney’s tax cuts, and completely eliminating them (which he has not suggested) would cover about 40% of the revenue needed.

As you might expect, high caps are quite progressive, i.e., they:

[I]mpose proportionally more of the tax increase on higher-income households, as new TPC estimates show. With tax rates 20 percent below today’s rates, about 83 percent of the revenue gain in 2015 from a $17,000 cap would fall on the top quintile and about 40 percent on the top 1 percent. Raising the cap to $25,000 would boost those shares to nearly 90 percent on the top quintile and fully half on the top 1 percent. A $50,000 cap would virtually exempt the bottom four quintiles from higher taxes: less than 4 percent of the tax increase would fall on them, while nearly 80 percent would hit the top 1 percent. (Phasing down the caps at high-income levels [DM: which Romney has mentioned as a possibility] would, of course, concentrate the revenue gains even more at the high end, but how much would depend on the details.)

More here.

4 thoughts on “How Much Money Can You Raise by Capping Deductions?”

  1. This is another poltiically crass and cynical effort on Romney’s part. Which Americans are most likely to have deductions that exceed the cap (and thus have their taxes rise)?

    Those with large mortgage payments, and those with large state tax bills. And where do those people live? Hmm, let me guess: California, New York, New Jersey, Maryland, Massachusetts, Connecticut, Washington. Do those states have anything in common?

    Now that you mention it, none of them are going to vote for Romney anyway. I doubt that this is an accident.

  2. I just ran some numbers and do not see where you are getting your information. Am I missing something?

    Top 20% of Taxpayers
    Tax Expeditures (Billions) 67% Exclusions 81.3% Itemized Deductions 96.1% Capital Gain Tax Rate Totals
    Health Insurance $173.70 $116.38 $116.38
    Deferred Retirement Plans $135.40 $90.72 $90.72
    Other Exclusions $216.90 $145.32 $145.32
    Mortgage Interest $88.70 $72.11 $72.11
    Charitable Deductions $46.20 $37.56 $37.56
    Capital Gains / Dividends $78.01 $74.97 $74.97
    Totals $738.91 $352.42 $109.67 $74.97 $537.06

    Federal Revenue by Source Romney’s Plan
    (2012 Estimate) 20% Tax Rate Reduction
    Individual Taxes $1,091.50 $218.30
    Corporate Taxes $181.10 $36.22
    Total Income Taxes $1,272.60 $254.52
    If 20% cut across the board for individual and corporate taxes, using 2012 estimates for revenue, then $255B lost but if all loopholes were closed for top 20% then potentially $537B revenue gained. What am I missing?

    1. Hi John – I can’t quite make out the tax expenditure part of your comment. On the tax cut side, remember that Governor Romney proposes not just a 20% reduction in individual tax rates (from today’s level), but also a 29% reduction in the corporate tax rate (from 35% to 25%) plus elimination of the alternative minimum tax, the estate tax, the taxes created by 2010’s health reform, and any capital gains, dividend, and interest taxes for folks making up to $200,000 (married). So the revenue needed from base broadeners (both individual and possibly corporate) would be significantly larger.

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