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Oldies but goodies in the budget

Last year's budget had some good ideas that never quite got enacted. My personal favorite was the proposal to slightly reduce the advantage that rich taxpayers get when itemizing their deductions. Under the plan, a wealthy taxpayer trying to write off this or that would get 28 cents off their tax dollar, not 39 cents. Most taxpayers get 10 or 15 cents, because most taxpayers aren't rich and so they work in lower brackets. This proposal would have raised more than $300 billion.

The Senate had little interest in it last year. But it's back this year. On its own, it would raise more money for the federal government than freezing discretionary spending. A fight over itemized deductions is also a lot less likely to end up hammering vulnerable folks than a fight over how to distribute a spending freeze. Also making return appearances are proposals to end some cotton subsidies and eliminate the loopholes that let investment bankers count their income as capital gains and pay a far lower tax rate.

The administration knows these are good ideas, which is why they keep including them. But the proposals aren't getting much ink, as they're not considered likely to survive the political process and the administration isn't pushing them very hard. I don't know how to fix any of that, so I'm writing a blog post on them, which is about the extent of my powers. If 60 senators happen to be reading this, well, you know what I think you should do.

By Ezra Klein  |  February 1, 2010; 3:01 PM ET
Categories:  Budget  
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Comments

Please, please, please end the cotton subsidies. End the insane policy of paying "farmers" to keep land unproductive (which led to a lot of welfare farmers--folks who bought or held on to land explicitly to get paid not to farm it). In fact, end all corporate welfare to huge agriculture conglomerates, while you're at it.

Then, if you want to change how rich people can itemize their deductions, awesome. But the amount of money that the government pays in corporate welfare--every dollar of which distorts the free market--should go away. And I certainly can't count on the Republicans to ever do it. Ever. Cuz, you know, the free market is awesome. Unless it involves taking government largesse away from a core constituency.

Posted by: Kevin_Willis | February 1, 2010 3:07 PM | Report abuse

Ok, Ezra, as you get deeper into the budget numbers, I have one request: Please, please always put a time frame next to your numbers. Is that $300 billion in one year? 10? A number of sources are throwing around 1 year and multi-year projections like there is no difference between them. This contributes greatly to our mass confusion.

Posted by: bswainbank | February 1, 2010 3:11 PM | Report abuse

Doesn't this only need 50 senators, plus the V.P.? Doesn't the budget always go through reconciliation?

Posted by: dh67956 | February 1, 2010 3:13 PM | Report abuse

Ezra,

great post and hopefully the light of day shines on issues like this. Another reason why transparency is a good thing.

so can we assume that if/when this doesn't happen (even though it should) that the budget will be then "off" by this estimated amount and then the defecit will be $300 billion greater?

Posted by: visionbrkr | February 1, 2010 3:29 PM | Report abuse

Conservatives should pay close attention to this idea. This "charity tax" is the scariest item in the budget and it needs to be fought as hard as possible!

Charity is what makes America a kind and good society and retaining the match of the deduction cap with the rate of the marginal income tax rate is very important to encourage charitable contributions to many important entities, including universities, from all Americans.

Decoupling the deduction cap from the tax rate is bad tax policy and it harms charity.

I fear that liberals first and primary goal is to grow government which thereby reduces the human quality of virtue that is created through making charitable contributions.

Taxing people is not a virtuous action either by government of from the taxpayer. Giving freely of oneself and one's earnings for the benfit of others is virtuous. It is a virtuous society which I believe all people want to live in.

Posted by: lancediverson | February 1, 2010 3:49 PM | Report abuse

lancediversion: "Decoupling the deduction cap from the tax rate is bad tax policy and it harms charity."

I talked to several leaders of 501(c)(3) organizations, and they didn't think the proposal would harm charitable giving at all. I think that's essentially right: most people decide how much they want to give, and then find the most tax-effective way of doing so--even if that's not necessarily a rational way to think about it.

I didn't understand why capping deductions at a 28% rate seemed to gain so little traction the first time around. Really, would so many people be deterred from giving just because they're getting 6 cents less on the dollar (and to be affected by that rate, you'd have to be making a pretty good chunk of change already)? I don't see why Warren Buffet should get a 36 cent subsidy for a dollar given to charity while a school teacher would get less than 20 cents (and Buffet would agree). And I think a 28 cent public subsidy is quite generous for what can be very quirky individual donations. Plus, if you're subjected to the Alternative Minimum Tax you're not getting 36% back right now anyway.

"Giving freely of oneself and one's earnings for the benfit of others is virtuous."

Yes it is. And that's why we shouldn't need to use treasury funds to subsidize giving by people who are already wealthy (and we're not talking about ending the subsidy, only providing a 28% subsidy instead of 36%). Giving should be virtuous on its own terms, and should be given "freely," not because you get a tax break for doing so.

By the way, if you give appreciated stock you can soak the treasury even more since the donation avoids the capital gains tax that would be incurred by selling the stock and giving cash. (This is another aspect that's available to Warren Buffet and not to your typical school teacher.) So for the wealthy, the taxpayer subsidy for individual charitable choices can easily top 50%, whether or not the public at large would agree with that person's choice of charities. A 28% cap seems more than reasonable to me.

Posted by: dasimon | February 1, 2010 4:13 PM | Report abuse

And as long as we're talking about capping deductions, it's good that it would also apply to mortgage interest. Presently, one can deduct the interest on a mortgage up to $1 million. But it's hard for me to see how one can justify a taxpayer subsidy for people who can afford a $1 million house (and that's assuming no money down).

If the purpose is to encourage home ownership for those who wouldn't otherwise buy, then the subsidy may make sense for those people. But it makes little sense (except as a sop to the real estate and construction industries) at higher levels. Capping the deduction at 28% would be a start in the right direction and would be unlikely to affect those who we think should benefit from the policy: lower income first-time buyers.

Posted by: dasimon | February 1, 2010 4:43 PM | Report abuse

What about Corporate donations to charity? Currently they are allowed to use market value (rather than actual cost to them) to value their donations.

Posted by: Beagle1 | February 1, 2010 5:54 PM | Report abuse

" Under the plan, a wealthy taxpayer trying to write off this or that would get 28 cents off their tax dollar, not 39 cents. Most taxpayers get 10 or 15 cents,"

Why can't we speak in plain English?

Under the plan, taxes for the weathly would go up. It would be far simplier to just raise the top rate to 40% and leave the deductions alone.

If you change the rate they can deduct things then you create a very complicated form.

Of course, the reason you can't raise the rate is that everyone would scream. So you figure out ways to limit exemptions and deductions that raise the same amount of revenue. All it does is make tax preparers rich.

Oh wait, I am a CPA who does tax returns for a living. Never Mind.

Posted by: neilwilson | February 1, 2010 5:56 PM | Report abuse

dasimon, the taxpayer's deduction is tied to the tapayer's tax bracket. The school teacher would only claim 20 cents on the dollar because that is the marginal tax rate for that school teacher (using your example). There is a perfectly logical match that should be logically maintained.

To decouple tax rate from tax deduction is simply a way to increase governmental revenues for governmental purposes and reduce revenues to and expenditures by charitable organizations. This change essentially values the services of the government as more important services than that of the charity. That is simply put an irreconcilable difference between liberals and conservatives, and I simply can not subscribe to Obama's theory.

Posted by: lancediverson | February 1, 2010 6:02 PM | Report abuse

I agree completely with neilwilson. Simply increase the top tax rate to something around 41%. That is a much better way to get the desired revenue than the charity tax.

Posted by: lancediverson | February 1, 2010 6:05 PM | Report abuse

lancediversion: "dasimon, the taxpayer's deduction is tied to the tapayer's tax bracket."

Yes, I understand that. But that doesn't mean that it should be tied to the taxpayer's bracket. The value of any benefit that's done through a tax deduction will depend on what bracket you're in. But it's not "perfectly logical" to say that a dollar given by a wealthy person should get a government subsidy of 36% (or substantially more if the gift is appreciated stock) while a dollar donated by a school teacher gets a government subsidy of less than 20%. In fact, one could argue that it's precisely backwards: the wealthy shouldn't need a bigger subsidy to be charitable. This is a regressive subsidy; we all pay for it, and it's not clear it's money used well. (And it's the same problem with the home mortgage interest deduction: the people who benefit the most are the ones least likely to need the subsidy.)

"To decouple tax rate from tax deduction is simply a way to increase governmental revenues for governmental purposes and reduce revenues to and expenditures by charitable organizations."

Again, there is no evidence that reducing the government subsidy for the wealthiest people from 36% to 28% would affect charitable giving (again, many people in the 36% bracket are already subject to the Alternative Minimum Tax and aren't getting the 36% deduction anyway). Again, I actually talked to development people at several charities and they did not express concern. Do you really think people, especially wealthy ones, would give differently on the basis of a difference of 8 cents on the dollar that one would get from the government?

As for increasing government revenues, just about no one thinks we can solve our fiscal problems without some combination of tax increases and spending reductions. If we're going to effectively increase tax rates, we should go after inefficient subsidies. This appears to be one of them.

"This change essentially values the services of the government as more important services than that of the charity."

No it doesn't. There is no initial reason why charitable donations should be subjected to special tax treatment at all. If people want to give, they can give; that's the "virtue" of it all, and it doesn't imply a value judgment of charity v. government. One can legitimately ask why the public in general subsidize individual people's charitable donations, especially when they go to causes that many of us might object to. That doesn't diminish anyone's role of charity; it just means that we don't need to subsidize it.

But if we do want to give tax breaks to encourage charitable giving, it makes little sense to value a dollar given by Warren Buffet more than a dollar given by a school teacher. I'd say that school teacher needs a tax break more than Buffet does. I'd be all in favor of a flat tax credit (as a percent of the total donated) rather than a deduction.

Posted by: dasimon | February 1, 2010 6:49 PM | Report abuse

neilwilson: "Under the plan, taxes for the weathly would go up. It would be far simplier to just raise the top rate to 40% and leave the deductions alone."

The problems with just raising the top rate is not only that it leaves what is essentially a regressive subsidy in place, it exacerbates it. Wealthier people will get an even bigger benefit from deductions (whether it's from home mortgage interest or charitable giving) when they're the ones least likely to need them.

A flat tax credit for everyone of, say, 25% of the amount donated to charity would be very simple. And fairer. And it would help rectify the complete waste of subsidizing people who can afford to take out million dollar mortgages.

Yes, there is the political advantage of not explicitly raising tax rates. But there are other valid reasons to cap the deductions.

Posted by: dasimon | February 1, 2010 6:59 PM | Report abuse

dasimon,

can we at least (for those of us in the northeast and especially NYC) regionalize that. $1 million gets you a one bedroom in NYC. Not exactly uber-wealthy.

Posted by: visionbrkr | February 1, 2010 7:13 PM | Report abuse

maybe if we all comment they will be more likely to come across this article.. (so i comment)

Posted by: schaffermommy | February 1, 2010 8:54 PM | Report abuse

visionbrkr:

Actually, I'm apartment-hunting in NYC right now (I've been a confirmed renter all my life), and you're right that $1 million gets you a 1BR in Manhattan. I'm not averse to regionalizing values, especially when it comes to things like establishing poverty rates.

But I still think that even in NYC, we shouldn't be subsidizing million dollar mortgages. Not everyone has a right to a deduction because they want to live in Manhattan; Brooklyn and Queens are nearby and quite nice. And you can get a very good 2BR in Manhattan for $1.5 million. If someone can afford that much, why should the rest of the nation subsidize it? Aren't there other very pressing priorities in our nation right now?

If I had my druthers, I'd eliminate the deduction entirely since I question the wisdom of subsidizing home ownership (I think it's very inefficient and lets realtors inflate home prices because they know buyers will be able to pay more). But at the very least, can we at least cap the deduction at 28%? That's more than enough of a subsidy for my taste. (And that the deduction is independent of income makes no sense at all; heck, the head of Goldman Sachs would qualify for the deduction!)

Posted by: dasimon | February 1, 2010 8:59 PM | Report abuse

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