Dean Baker: Capping tax deductions is a bad idea [View all]

http://www.nationofchange.org/tax-games-and-redistributing-income-upward-1360074059

The picture looks even less appealing when we consider that contributions to charity are likely to be excluded from the cap. This means that if a wealthy person feels bad about homelessness so that she contributes $100,000 to a charity to shelter the homeless, the federal government will pick up $40,000 of this tab. However if she and others in the state consider sheltering the homeless to be an obligation of government that should not depend on the kindness of the wealthy, the taxes to cover the cost will be fully born out of their own pocket.

It’s hard to see the rationale for this asymmetry, but wait, it gets worse. Suppose our rich person gives $100,000 to an opera that he and his rich friends patronize. The federal government will pick up $40k of that contribution, but zero for the state government’s efforts to shelter the homeless. Suppose that our rich person decides that his friend should get a $1 million dollar annual salary to run the opera. Well, the feds are on the hook for 40 percent of his friend’s salary, but still not contributing to the state’s efforts to shelter the homeless.

The point here should be clear. The effort to cap deductions is not actually about making the rich pay higher taxes; it is about putting pressure on state governments to cut back their services. President Obama proposed limiting deductions to a 28 percent rate regardless of individuals’ tax rate. This policy makes sense as a way of getting more tax revenue from those who can most afford to pay it. Capping the deduction does not. There is a reason that Republicans support it.