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Thursday, October 28, 2010

Deficit Commission and Tax Expenditures

There is talk that President Obams's Deficit Commission might recommend curtailing of some tax expenditures! This would certainly be progress in making the law more equitable, neutral and efficient as well as less complex.

Here is a CNNMoney article on the story - Bye-bye, tax breaks? (10/26/10)

Some of my prior posts and articles calling for reduction in tax expenditures at federal and California levels - here and here.

What do you think?


Peter Reilly said...

I really think "tax expenditures" is an oxymoron. It implies that there is some sort of "right" amount of tax and anything less is something we are getting away with.

Professor Nellen said...

Yes, I've heard that argument before. But I don't completely buy it. For some deductions, such as the standard deduction and personal exemptions, I think those need to be in the measure of taxable income to recognize the fact that some portion of one's income should be available only for living purposes, not for tax purposes.

But for a mortgage interest deduction I don't buy that argument. When Individual X with $1.1 million of mortgage debt saves $23,000 of taxes for that liability, it is paid for by others via higher taxes than would be needed if the deduction allowed were not so high or so skewed to those with greater ability to borrow and greater income such as to be in higher tax brackets.

Why not better equalize deductions via the standard deduction and personal exemptions to get the "right" amount of tax for everyone?

Marija Mirkovic said...

Taxpayers don’t proportionally benefit from tax expenditures that are currently available. The benefit will depend on taxpayer’s involvement in transactions and activities that are favored buy the tax law. More than two thirds of the taxpayers don’t itemize so they can't take advantage from these provisions, while people in the high tax brackets are looking to maximize their deductions whenever they are available. Mortgage interest deduction is one example. Such a generous mortgage interest deduction can also boost the home prices making them even less affordable to the folks with lower income.

The tax law would be more fair and neutral if most tax expenditures were curtailed/eliminated. If deductions are significantly reduced and the rates were lowered, the tax law would be perceived as more fair, it would be simpler, more transparent, efficient, and it would reduce cost of compliance.

Some tax expenditures should still be available. Deduction of medical expenses should be available given our high cost of healthcare. Any reasonable business expenses should be fully deductible because they are incurred for production of income.