March 08, 2010
More on Obama's Itemized Deduction Proposal
Posted by Sarah Lawsky

My post describing Obama's itemized deduction proposal has generated some great comments, many of which I agree with.

First, it appears that I may have come across as supporting the general approach of phaseouts and other tinkering that effectively increases the marginal rate. This is absolutely not true. I could not agree with DirtyJobsGuy,Troyus, Joel, mochalite et al. more: the lack of transparency of the tax code is a serious problem. For example, Section 68 is supposedly a reduction in the benefit of itemized deductions for those who earn above a certain amount, but it is in fact, for most whom it affects, just a marginal rate increase (because of the way that it reduces the benefit). And the AMT is not only a shock to many taxpayers who end up owing it, but also permits all kinds of political shenanigans, where politicians can claim to be reducing taxes but in fact aren't (because any "reductions" in the regular tax are almost completely offset by increases in the amount of AMT owed). I do not think this is the way to run a tax system, and I strongly support tax simplification. Ideally, the government would set a broad base, impose rates on that, and proceed from there.

Second, bjh1970 points out that "[t]he overarching problem with anything linked to a specific income level is that it varies widely from place to place. I realize that $250K seems like a lot of money to someone in, say, Wichita ( and, in fact, IS a lot of money in someplace like Wichita) but for example, in the metro DC area...$250K is firmly middle of the middle class." This is really interesting. Our whole progressive rate structure is, of course, tied to income levels, and it rarely adjusts for location. Michael Knoll and Thomas Griffith, Taxing Sunny Days, 116 Harv. L. Rev. 987 (2003), provides a in-depth analysis of this complicated issue.

Third, EL asks, "won't this proposal reduce charitable giving?" The short answer is: almost certainly yes, though the degree to which it would do so is debated. The Center on Budget and Policy Priorities, for example thinks the effect would be small; others are more concerned. (More generally, Jon Bakija and Bradley Heim, How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation, discusses the question of the price elasticity of charitable giving.)

Finally, Joe "ha[s] to question the analysis of anyone who thinks a Health Savings Account deduction is reported on Schedule A and not on line 25 of the 1040. If you get something this basic wrong, I wonder what else is incorrect." I thank him for this correction, and urge him and others to look for additional things in the post that are objectively wrong--I am pretty sure my general analysis of the proposal is correct (in part because I read the sources I link to at the bottom of the page), but I always appreciate substantive corrections.

[Updated to fix links in the paragraph regarding charitable giving and to make clearer that the Bakija and Heim article does not stand in contrast to the previous two links, but rather provides a more general discussion of the elasticity of charitable giving.]

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