Revisiting the Feldstein-Feenberg-MacGuineas Cap

Both parties are studying cuts in tax expenditures (TEs) as a means to reduce the federal deficit. Super Committee Republicans have offered a proposal to limit the amount of tax expenditures to help generate about $250 billion in new revenues, while Super Committee Democrats have proposed an automatic trigger to limit TEs (a la the Feldstein-Feenberg-MacGuineas approach). So, this is a good time to revisit "Capping Individual Tax Expenditure Benefits," a study on an approach to limit TEs by Martin Feldstein, chairman of Reagan’s Council of Economic Advisors, NBER’s Daniel Feenberg, and CRFB President Maya MacGuineas.

They show that a TE benefits cap of 2 percent of household income (AGI) would lower the federal deficit by $278 billion in a single year. They slice and dice that sum (their Table 3) into forty-eight segments, six different TE categories across eight income groups. They also indicate annual sum savings of $208 billion if the cap were 3 percent or $110 billion with a cap of 5 percent.

Universal application of a TE benefits cap would have a nearly flat distributional effect (looking at the far right column below). Fortunately, the FFM paper also provides the data for legislation to be written to target specific distributional effects. For example, a progressive effect could be achieved by exempting the health insurance exclusion and the Child Tax Credit from the TE cap and/or by treating lower-income groups altogether separately, and/or the share borne by middle-income earners could be lowered to match top-earners’ share by excluding part of or all of the mortgage interest deduction from the TE cap.

For reaching federal budget savings through tax expenditures cuts, then, lawmakers have a myriad of possibilities at their disposal.