More Analysis of Gov. Romney's Deductions Cap

After we analyzed a part of it two weeks ago, Governor Mitt Romney's tax plan is back in the news, with a proposed deduction cap as the subject of a new Tax Policy Center study. He had mentioned a $25,000 dollar cap on deductions as a possibility in his tax plan during the debate Tuesday night and has previously proposed a $17,000 cap.

Since the campaign has not yet pinned down a specific number, the Tax Policy Center has examined both caps as well as a $50,000 scenario, applying this cap to itemized deductions only. With the plan's 20 percent rate cut and Alternative Minimum Tax repeal, the $17,000 cap and $25,000 would raise $1.7 trillion and $1.3 trillion, respectively.

Impact of Options to Limit Itemized Deductions (billions)
  2013-2022 Revenue
Option 1: Repeal All Itemized Deductions  
    Current Law    $2,617
    Current Policy $2,200
    20 Percent Rate Cut and AMT Repeal $1,964
Option 2: Cap Itemized Deductions at $17,000  
    Current Law $1,583
    Current Policy $1,747
    20 Percent Rate Cut and AMT Repeal $1,659
Option 3: Cap Itemized Deductions at $25,000  
    Current Law $1,177
    Current Policy $1,286
    20 Percent Rate Cut and AMT Repeal $1,269

Source: Tax Policy Center

This is far short of the $5 trillion in projected lost revenue from the proposed 20 percent rate cut, elimination of the AMT, estate tax repeal, capital gains and dividends tax repeal for people making less than $200,000, and the corporate tax cuts (by our estimate, about $3.8 trillion comes from the individual side). However, during the debate on Tuesday, Governor Romney said that not only would the cap apply to itemized deductions, but also to exclusions and other credits which the TPC study doesn't include. This would certainly lead to more revenue, but it is unclear how much it would raise. It would also depend, of course, on what exactly he includes in the cap.

It's worth noting that this approach would be a very progressive way to raise money from tax expenditures. Distributional tables from the TPC shows that the tax increase for the $17,000 cap would fall mostly on high income earners average tax increase of 2.3 percent for the top quintile with a negligable tax increase of less than 0.2 percent for the bottom two quintiles. Combining the cap with the proposed rate cuts yields a regressive result overall, but that could be corrected by including other tax preferences that go disproportionately to high earners and by going after savings preferences.

TPC's report doesn't mean that limiting tax expenditures could not finance rate reduction -- or deficit reduction -- while maintaining progressivity. If more is put on the table, the Simpson-Bowles and Domenici-Rivlin plans are proof that rate reducing base broadening tax reform can work.

The TPC report can be found here.

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