Deadweight deductions

19 September 2011 By Martin Hutchinson

Forget the provocative Buffett Rule. Obama’s simpler proposal to cut tax deductions could add up to $9 trln to the government’s revenue over 10 years. There’s even a hint of common ground with the GOP. Best of all, killing off many deductions would do little economic harm.

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Section 401 of President Barack Obama’s American Jobs Act of 2011, introduced on Sept. 14 by Democratic Senator Harry Reid, provides that the tax value of all itemized deductions and certain other tax expenditures shall be limited to 28 percent of adjusted gross income for taxpayers with an income of $200,000 - rising to $250,000 for married couples.

Republican House Speaker John Boehner, speaking at the Economic Club of Washington on Sept. 15, called for the congressional committee that is seeking budget savings to “develop principles for broad-based tax reform that will lower rates for individuals and corporations while closing deductions, credits and special carve-outs in our tax code.”

According to the White House Office of Management and Budget’s 2012 budget, the individual income tax expenditures costing over $200 billion over the five years from 2012 to 2016 were:

- Exclusion of employer contributions for medical insurance ($1,110 billion)
- Deductibility of mortgage interest
($609 billion)
- Employee retirement plans ($540 billion)
- Step-up basis of capital gains at death
($357 billion)
- Deductibility of charitable contributions
($305 billion)
- Exclusion of net imputed rental income
($303 billion)
- Deductibility of state and local taxes
($292 billion)
- Lower rate on capital gains ($256 billion)
- Tax-free status of employer retirement plans
($246 billion)
- Exclusion of municipal bond interest
($230 billion)
- Capital gains tax exclusion on home sales
($217 billion).

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According to the White House Office of Management and Budget’s 2012 budget, the individual income tax expenditures costing over $200 billion over the five years from 2012 to 2016 were:

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