Before last week’s presidential debate, and under pressure to explain how he’d pay for a costly 20 percent across the board income tax rate cut, Mitt Romney tossed off an idea that caught the attention of critics and allies alike.
Instead of naming which tax loopholes and benefits he’d like to end, Romney suggested imposing an overall itemized deductions cap at $17,000 — and eliminating deductions altogether for top earners. Though he elided key details, such as whether the cap would apply to the value of the deductions themselves or to the dollar amount by which individuals and households could benefit each year, it was the first time he’d offered anything approaching a specific plan to offset the huge projected costs of his proposed rate cuts.
Data from the Tax Policy Center indicates that a $17,000 cap on deduction benefits would on average impact upper income earners more than middle income earners and middle income earners more than low income earners. And because higher income people are much more likely to itemize than middle and lower income people, it would disproportionately impact high earners.The top portion of the chart below shows the average itemized deductions by the income levels of itemizers. The bottom portion of the chart takes a closer look at the average itemized deductions for the top 20 percent of earners.
To be clear, the initial $17,000 figure that Romney threw out early last week doesn’t appear to be locked in just yet. Later in the week, at the debate in Denver, Romney floated higher cap numbers in describing his plan: “One way, for instance, would be to have a single number. Make up a number — $25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people.”
Some progressive tax experts have supported versions of this idea — in isolation. Those same experts were quick to point out that taken together with the rest of Romney’s plan it’s a raw deal — the higher burden for wealthier Americans would be more than offset by the top-bracket rate cut Romney’s proposed. And the rate cuts he’s proposed for middle income earners wouldn’t be enough in some cases to make up for the higher burden they’d face from the deductions cap.
“We’ve said some decent things about a cap, but not in the context of dramatic cuts in tax rates,” said Chuck Marr, tax policy director at the liberal-leaning Center on Budget and Policy Priorities.
Likewise, experts say that under almost any interpretation of Romney’s idea, it wouldn’t raise enough revenue to render his broader plan revenue neutral. Either it would add to the deficit, or he’d have to effectively raise taxes on middle income earners.