Every year, individual American taxpayers choose between itemized deductions – 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. deductions for certain sorts of expenses – or the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , 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 baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . 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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