Skip to content

Romney’s Proposal to Cap Deductions at $17,000

By: William McBride

Today Romney proposed to cap 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. s at $17,000, as a way to pay for his cut in personal 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. rates. This is not sound tax policy, as it would complicate the code, and likely require a number of exemptions and other loopholes. For instance, how would legitimate business deductions be dealt with? Which ones are legitimate?

However, it would raise revenue, primarily from high-income earners. The latest IRS data (2010) indicates that 47 million itemize, and the total amount of itemized deductions is $1.2 trillion. As the charts below show, most itemizers are middle-income earners, but most of the dollar value of deductions is at the high end. The average deduction is $26,084, but among those itemizers earning over $200,000 the average deduction is $82,434. If all those high-income earners’ deduction were capped at $17,000 it would make taxable an additional $270 billion. If that income were taxed at the top rate of 35 percent it would generate $94 billion in revenue. However, that is optimistic, and surely much of that income would suddenly go into hiding. It would also wreck the economy.

We need more clarity about this proposal, but so far it sounds like an invitation to lobby for exemptions. It would be better to eliminate entirely certain wasteful tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s, while lowering rates.

Follow William McBride on Twitter @EconoWill