One good thing about the election is that I don’t instinctively flinch every time the White House releases new policy initiatives. Case in point: tax expenditures. What’s a tax expenditure?
Tax expenditures are “preferences and concessions in the income tax that [have] the nature of expenditure programs.” In other words, when you can deduct an expense (or receive a refund for the whole cost), that is a tax expenditure. The mortgage interest deduction is also a tax expenditure: if we wanted, we could have the Treasury write you a check equal to the amount of the deduction.
I use that example because it highlights one of the problems with tax expenditures, as opposed to direct subsidies: the higher your income, the more money the government pays back to you. Again, consider the mortgage interest deduction. If we actually think it’s good policy to subsidize interest payments on housing (I say not), then shouldn’t those who need the money the most–those in lower tax brackets–get the most money per dollar of interest? At the very least, they should get the same amount of money.
Administration officials said Mr. Obama would propose to reduce the value of itemized tax deductions for everyone in the top income tax bracket, 35 percent, and many of those in the 33 percent bracket — roughly speaking, starting at $250,000 in annual income for a married couple.
Under existing law, the tax benefit of itemizing deductions rises with a taxpayer’s marginal tax bracket (the bracket that applies to the last dollar of income). For example, $10,000 in itemized deductions reduces tax liability by $3,500 for someone in the 35 percent bracket.
Mr. Obama would allow a saving of only $2,800 — as if the person were in the 28 percent bracket.
The White House says it is unfair for high-income people to get a bigger tax break than middle-income people for claiming the same deductions or making the same charitable contributions.
I still would prefer fewer tax expenditures and more direct subsidies for all sorts of reasons, but this is a step in the right direction.