Cap tax deductions, says former Reagan economic adviser

March 14, 2013

President Obama's been making the rounds on Capitol Hill, trying to woo supporters for a grand bargain, a bipartisan agreement to reduce the deficit.

The problem is that both Democrats and Republicans are still entrenched in their traditional approaches to dealing with the country's finances. The GOP wants to take an almost total spending reduction route. Dems want to add some new revenue, aka taxes, to the mix.

As part of his effort to get the loyal opposition at least talking, Obama visited Capitol Hill on Wednesday (March 13) and met with the House Republican Conference.

Seven GOP Representatives got to question the president, including Ways and Means Chair Dave Camp (R-Mich.). But instead of asking Obama anything, Camp explained why Republicans want to enact comprehensive tax reform rather than use the elimination of loopholes as bargaining chips in any fiscal discussion.

"I just said, 'We don't want a piecemeal tax reform because then you don't get the economic growth, job creation and increased wages and benefits that we want to see,'" Camp told Roll Call. He said it was "good exchange" and that Obama "certainly listened and I think the point was made."

Deduction targets: As the two sides were conducting legislative reconnaissance, another Republican was sharing his tax advice in the Washington Post opinion section.


Schedule A snippetMartin Feldstein, a professor of economics at Harvard University and former chairman of the Council of Economic Advisers under
President Ronald Reagan, says it's time to cap tax deductions.

Actually, it's a position Feldstein advocated a month earlier in the Wall Street Journal.

Uncle Sam loses billions of dollars through a variety of relatively small
tax breaks that should be totally removed from the tax code, says Feldstein.

But the big
political and fiscal challenges are large tax subsidies — deductions for home
mortgage interest, employer-provided health insurance and state and local taxes.
Any attempt to eliminate these, notes Feldstein, would almost certainly fail.

"That is why I advocate allowing taxpayers to keep all of their
current deductions and exclusions — but limiting the extent to which
they can reduce their tax liabilities in this way," writes Feldstein.

He elaborates:

"More specifically, I believe that Congress should cap the reduction
in tax liabilities that taxpayers can gain from using these special
features of the tax code. The tax benefits should be limited to a
percentage of the individual’s total income. I favor a cap of 2 percent
of adjusted gross income (AGI) on the tax benefit that an individual
receives from deductions and from the exclusion of municipal bond
interest and of the value of employer payments for health insurance."

Feldstein
says a 2 percent limit on deductions and exclusions would raise more
than $2.1 trillion. And with that much extra revenue from
tax reform, says Feldstein, some tax rates could be cut.


Existing deduction limits: The American Taxpayer Relief Act enacted in January reinstated a limit on itemized deductions, but it applies just to higher income earners.

Beginning with the 2013 tax year, single filers making more than $250,000 and jointly filing married couples making more than $300,000 would have their itemized tax expense claims reduced by 3 percent of AGI. The earnings amounts will be adjusted annually for inflation.

But the overall deduction reduction, called the Pease rule after the congressman who originally championed it, can't
exceed 80 percent. And the limitation doesn't apply to deductions for
medical payments, investment interest expenses, wagering losses and casualty
and theft losses.

Feldstein's 2 percent reduction would apply to all taxpayers. Using just itemized deductions, a single filer making $75,000 could claim only $1,500 in deductions. One making $250,000 (the current deduction reduction threshold) would be restricted to $5,000 in deductions on Schedule A.


Charity exempted:
And Feldstein also fell prey to the same trap that both tax writers and taxpayers routinely fall into. He carved out a exclusion for a tax break he favors.

Feldstein would spare charitable contributions from the deductions limit.

"The full deduction for charitable contributions should be retained," says Feldstein, "because the money that taxpayers give to charity benefits those
organizations rather than the individual taxpayer."

Feldstein says a 2 percent limit on deductions and exclusions would raise more than $2.1 trillion. And with that much extra revenue from
tax reform, says Feldstein, some tax rates could be cut.

You also might find these items of interest:

Share:

The More Tax Posts tab at the top of this page will take you to, well, more tax posts. You also can search below for a tax topic. 

Latest Posts
The latest Dirty Dozen tax scam list is familiar because too many are still falling for the schemes

March 5, 2026

Tax filing season is also peak time for tax scams. Be on the lookout for…

Read More
Hello Tax Season 2026

Happy New Tax Year! Are you ready to file your 2025 tax return? I know, too early to ask. But Tax Day 2026 will be here before we realize it. The Internal Revenue Service deadline to file and pay any tax we owe is the regular April 15 date this year. It’s also Tax Day for most of the states that collect income taxes from their residents, which is most of the states! If that seems too far away right now, don’t worry. As is the case every tax season, the ol’ blog’s tips and other tax reminders should help all of us meet our state and federal responsibilities. Procrastinators also will want to keep an eye on the countdown clock just below. It tracks how much time we have until April’s Tax Day, just in case we put off our annual tax task until the absolutely final hours and decide we need to instead get an extension request into the IRS by that date. (Note: I’m in the Central Time Zone, so adjust accordingly for where you live.)

Comments
  • As long as it will raise employment rate, improve the everyday life of countrymen, I think this policy should be followed.

  • Kay:
    You said above: “Feldstein’s 2 percent reduction would apply to all taxpayers. Using just itemized deductions, a single filer making $75,000 could claim only $1,500 in deductions. One making $250,000 (the current deduction reduction threshold) would be restricted to $5,000 in deductions on Schedule A.”
    but that’s not quite what Feldstein said. He said that the tax “benefit” would be limited to 2% of AGI – and later in the article he clarified that he was talking about the net “tax reduction”, so that someone in the 25% marginal rate bracket, for example, would be allowed to deduct 8% of AGI to get the 2% tax benefit.

Leave your comment