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Tax Principles

Monday, 03 December 2012 06:05

The Washington Post told readers:

"both sides agree that as a principle, keeping tax rates low while eliminating deductions is better than increasing tax rates."

While this is true as a general principle, the preference for lower rates is considerably more complex than the statement implies. In almost any scenario of trading off lower rates for fewer deductions, the very wealthy end up ahead. Not everyone views this as desirable.

Also, the limiting of deductions is likely to pose problems for higher tax states, which could effectively count on the federal government to provide somewhat of a subsidy by lessening the impact of state and local taxes on high income taxpayers. In addition, one of the largest deductions is for charitable contributions. There is not agreement that limiting this deduction would be an appropriate trade off for lower tax rates.

Comments (9)Add Comment
written by JDM, December 03, 2012 6:16
"as a principle" having everyone pay taxes voluntarily in whatever amount they feel is proper for the good of society is terrific too. In reality, however, that "principle" gets mangled real big real fast. Such "principles" do not take account of reality.
Rates vs Deductions is false dichotomy
written by Robert Salzberg, December 03, 2012 6:33
I believe all current tax deductions are poorly designed policy but rates can be just as poorly designed or worse than specific deductions.

The decision to raise rates or eliminate, lower or modify deductions shouldn't be a matter of principle. The decision to raise rates or lower deductions should be entirely dependent on the policy.

For instance, raising rates on carried interest from 15% and raising rates on estate taxes would be good policy best carried out through raising rates and near impossible to do by adjusting deductions.

Eliminating the deductions for corporate jets and for oil and gas subsidies would also be very difficult if not impossible to achieve with rate adjustments.

No matter what, eliminating deductions increases effective tax rates which are the rates people actually pay so in the final analysis eliminating deductions and raising rates are the same thing.
written by ComradeAnon, December 03, 2012 8:36
They could have written "both sides agree that as a principle, eliminating taxes altogether while eliminating deductions is better than increasing tax rates" and stated another general principle. "Water is wet" would work too.
no no no...return to the 70s like some want with higher rates like 70%...
written by pete, December 03, 2012 11:10
Lets hike rates back up and increase deductions. Deduct interest on credit cards and cars like in the good old pre Reagan days. Then there were lots of cool partnerships by the wealthy to deduct all kinds of crap.

But of course recall that during those times the top earners paid a much smaller share of federal tax revenues than they do now.
written by Mark Jamison, December 03, 2012 1:23
Two different issues really. Deductions and the general complexity of the tax code have become a means of burying policy in paces where people cannot detect the effect - see Mettler's The Submerged State. It also has the impact of using complexity to create obfuscation which breeds hidden advantage.
Tax rates and how we apply them ought to be done with the goal of maximizing efficiency (which ought to include the principle of progressivity) while maintaining the overall goal of the tax system which is to raise revenue.
Our tax system has become a system of avoidance of discussions of priorities. To the greatest extent possible we ought pass policy prescriptions as separate legislation and design the tax system to raise sufficient revenues to fund those priorities. There may be instances like EITC where the tax system provides an efficient and effective means of accomplishing policy but those should be kept to a minimum and accomplish a very clear goal.
written by Bloix, December 03, 2012 1:38
In contemplating the elimination of the state tax deduction, Obama appears to ready and willing to slam the taxpayers and state goverments of California, New York, New Jersey, and Massachusetts. The result would be pressure in these and other blue states to reduce state tax rates and to cut state social programs for middle class and poor people. This is consistent with Obama's practice of selling out his base whenever possible.
right Bloix
written by ethan, December 03, 2012 2:08
And benefiting states such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming -- each of which has either no personal income tax, or taxes only special types of income (for example Tennessee which taxes only income from stocks and bonds).
written by urban legend, December 03, 2012 2:20
"Both sides" do not agree. It is critical to the nation to begin reversing the takeover of the government by the wealthy. Going back to a level of progressiveness that prevailed when unemployment was low and incomes at even the lower levels were rising is extremely important for showing ordinary Americans that government can actually work for them.

I do not believe that the level of cynicism we have today, reflected in our horrible voting participation rates, is without significant economic consequences. I think anyone with the credentials to claim to be an economists -- who thinks it's all charts and models of more easily-measurable economic data -- needs to re-examine the claim.
Bias at NPR. In general, the mortgage deduction takes from the working class.
written by Rachel, December 03, 2012 8:40

I'm shocked at how frivolous they can be at NPR. The piteous story of the firefighter who really needed his $30,000 mortgage deduction . . . this is not serious economic journalism. Then there was Robert Scheer, self-proclaimed leftie, defending the deduction on the grounds that families need it to build long-term wealth. Well, many an individual leftie has not taken Econ 101. But surely among the "liberal" types on public radio someone should have enough background and sense of balance not to mislead the audience with such unrepresentative anecdotes. The firefighter with the home in wealthy Ventura is being subsidized, in effect, by the taxes of renters, by the low-income elderly who own their own homes, and by low-income home-owners in less wealthy areas. He's being subsidized, just as surely as the property speculators who are busy buying up distressed properties right now, in expection that the property bubble, fueled by this loophole, will soon reinflate.

NPR should have said something of the unfairness. Or someone should. And someone needs to persuade Robert Scheer to either spend more time in the library, or give back his leftie card.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.