Yesterday we released an independent report (PDF) analyzing Nevada Governor Brian Sandoval’s proposed Business License Fee tax. The proposal replaces Nevada’s current $200-flat business license fee with a tiered gross...
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- The Standard Deduction Undermines Itemized Deductions
The Standard Deduction Undermines Itemized Deductions
Every year, individual American taxpayers choose between itemized deductions – tax deductions for certain sorts of expenses – or the standard deduction, which is a flat amount based on filing status. The standard deduction has a certain logic to it. You wouldn’t want to leave out the regular folk who don’t have any cool itemized deductions, would you? It seems like a compassionate, fair thing to do.
On further inspection, though, the standard deduction and itemized deductions are intellectually incompatible. The entire point of itemized deductions is to award tax relief only to people who spend their money in particular ways. The standard deduction, for better or for worse, undermines the concept. It awards tax relief to people who don’t spend their money in those particular ways, as well.
In the end, the standard deduction makes itemized deductions irrelevant to the majority of taxpayers. Itemized deductions are claimed by only 32.1% of taxpayers overall, and standard deduction filers outnumber itemizers in every single state.
The standard deduction, then, does not make much sense if you believe itemized deductions are useful, valuable adjustments to the tax base. Why wipe out those effects for two thirds of taxpayers?
The standard deduction makes a lot of sense, though, if you believe itemized deductions are arbitrary and confusing. In that case, the standard deduction restores some fairness and reduces paperwork, bringing the tax code more in line with our Principles of Sound Tax Policy – particularly, neutrality and simplicity.
The standard deduction is an interesting half-step towards eliminating itemized deductions, suggesting that America is actually quite ambivalent about them.
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