Analysis of Romney’s Tax Plan With and Without a $25,000 Cap on Itemized Deductions

Either cap on itemized deductions would offset a portion of the Romney taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate cuts, mainly for upper income taxpayers. In the aggregate, we estimate that the $25,000 cap would raise roughly $1.3 trillion in revenue over ten years, on a static basis (versus about $1.75 trillion for the $17,000 cap).

The Romney tax plan, before considering the deduction caps, would add close to 7.5 percent to the GDP over time, resulting in additional tax revenue sufficient on a “dynamic” basis to offset about 60 percent of the initial “static” cost of the tax plan. The deduction caps would cover a large portion of the remaining net revenue cost, although they would reduce the gains in economic growth slightly.

We estimate that, in dynamic terms, the combination of higher economic output and the $25,000 itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. cap would offset about 83 percent of the static revenue loss of the Romney tax cuts, as opposed to 93 percent under the $17,000 cap. This leaves relatively little to be recovered through spending restraint or other tax offsets.

The $25,000 cap would trim about 0.3 percent off the 7.4 percent growth in the economy that the Romney plan would produce without a cap. The $17,000 cap would trim more growth, about 0.4 percent.

There is a bit more GDP and income growth, about 0.1 percent of GDP, with the higher cap, because taxpayers experience less of an increase in the effective state income tax rate on labor and capital income. Wages, in all income classes across the board, would be about 0.1 percent higher under the higher cap because of a bit more additional capital formation and productivity affecting all earners.

On a per taxpayer basis, the $25,000 proposal reduces the Romney tax cut by less than the $17,000 cap. Averaged over all taxpayers, the difference is about $10 to $110 for taxpayers in the $2,000 to $75,000 income ranges (leaving them that much more of the initial tax reduction), and about $250 to $2,000 in higher income ranges.