Presidential candidate Hillary Clinton has a pretty good idea on taxes when it comes to itemized deductions. To explain what this idea is, though, one first needs to have a little background on how itemized deductions work. Itemized deductions are the 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. provisions that let people reduce their taxable incomes by listing things on their Schedule A. Some examples include the deduction for mortgage interest payments, or deductions for state and local taxes.
The value of tax deductions depends in part on what tax bracket you are in. For example, consider the deduction for mortgage interest. Suppose two taxpayers each pay $10,000 in mortgage interest in a year. Suppose one of these taxpayers makes $250,000 a year, and consequently has a 33% top rate on her income. Suppose that the other makes $80,000 a year, and consequently has a 25% top rate on her income. Each would deduct $10,000 from her taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. , but this would be more valuable to the first taxpayer than the second. Namely, the first taxpayer would get a $3,300 reduction in her tax bill, and the second taxpayer would get only a $2,500 reduction in hers.
So where does Hillary Clinton’s proposal fit in? It would limit the savings from tax deductions to 28 percent of the value of the deduction. In our example above, the taxpayer who got a $3,300 reduction in her tax bill would instead get only a $2,800 reduction in her tax bill from the $10,000 in deductions that she took. It would not affect the second taxpayer, whose savings from the deductions ($2,500) were already less than 28 percent of the total value of the deductions ($10,000.)
Running this through the Tax Foundation’s Taxes and Growth model, we can see that this proposal raises a reasonable amount of revenue without substantially harming the economy. If the revenue is put to good use, this is a proposal worth doing.
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Economic and Budgetary Effects of a 28 Percent Itemized Deduction Limitation |
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Static Revenue Impact (2016-2025) |
$310 Billion |
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Dynamic Revenue Impact (2016-2025) |
$217 Billion |
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Long-Run Change in GDP Level |
-0.3% |
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Full-time Equivalent Jobs |
-152,000 |
The proposal would raise revenue, but also slightly reduce hours worked in the economy by increasing people’s marginal tax rates. It would generate a total of $217 billion in revenue over ten years after considering its economic impact. But if you suppose the proposal is matched with spending that creates some growth (such as useful infrastructure projects) that offsets the negative effects from the tax increase, then this proposal would increase revenues by $310 billion.
Its increased revenues, at least on a static basis, would come from higher-income taxpayers.
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Distributional Impact of a 28 Percent Itemized Deduction Limitation |
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Income Group (Percentile) |
Static Percentage Change in After-Tax Income |
Dynamic Percentage Change in After-Tax Income |
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0% to 20% |
0.0% |
-0.3% |
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20% to 40% |
0.0% |
-0.3% |
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40% to 60% |
0.0% |
-0.3% |
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60% to 80% |
0.0% |
-0.3% |
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80% to 100% |
-0.4% |
-0.7% |
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90% to 100% |
-0.6% |
-0.8% |
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99% to 100% |
-1.3% |
-1.6% |
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TOTAL |
-0.2% |
-0.5% |
As tradeoffs in tax policy go, this is a relatively efficient proposal, with fewer downsides than most. It is worthy of consideration.
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