Domestic Taxes

Romney floats limit on deductions

Republican presidential candidate Mitt Romney floated a $17,000 cap on tax deductions, a proposal that could reconcile his pledge to lower tax rates with his promise to make the plan deficit-neutral.

Limiting individual tax deductions could also hit the rich more than the middle class, which could help Romney ensure his plan lowers the effective tax burden on the middle class even as it could raise the tax burden on the wealthy. Romney has been under criticism from the Obama campaign for offering policies they say would benefit the rich and hurt the middle class.

Romney floated the idea the day before his first debate with President Obama during an interview with a local television station in Denver.

“As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others — your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way,” Romney said in an interview with Denver’s FOX31. “And higher-income people might have a lower number.”

A cap on deductions would allow taxpayers to continue to take advantage of popular tax incentives for buying a home, having a child, or contributing to a 401(k) account.

And a Romney aide said Tuesday that the $17,000 cap would be in addition to a personal exemption that could be dialed up or down depending on the numbers in order to prevent an effective tax increase on middle class families, and a separate provision to exempt health care costs. The combination of the three, the campaign argued, would be one possible way to both accomplish Romney’s stated tax goal, keep effective tax rates from rising on middle class and poor families, and keep the plan deficit neutral.

The proposal could have political legs because Republicans wouldn’t be forced to defend the elimination of certain popular tax breaks that Democrats have highlighted on the campaign trail. But at the same time, it’s unclear whether such a plan would actually satisfy Romney’s requirement of being deficit-neutral, especially because such a claim would be contingent on quick economic growth.

Henry Aaron, a senior fellow at the Brookings Institution, was instantly skeptical of the idea.

“This is complicated stuff, and if you’re serious about it, you don’t sort of throw out half-baked ideas on the campaign trail,” he told The Hill. “That’s what this sounds like to me.”

Aaron pointed out that charitable donations could be pinched by the new cap, and businesses run via partnerships or sole proprietorships, whose owners file individual income tax returns, could also be impacted.

“My guess is universities and libraries would not be happy with that provision,” he said.

Furthermore, not just homeowners in mansions could see their ability to reap mortgage interest deductions capped by Romney’s proposal. Doing rough math, Aaron pointed out that a $300,000 mortgage with an interest rate of six percent — not out of the question a few years ago — would end up with $18,000 a year in mortgage interest.

“That’s not a high-end house these days,” he said.

Alex Brill, a research fellow at the American Enterprise Institute who previously was a top Republican staffer on the House Ways and Means Committee, said it was tough to nail down who would be impacted based on Romney’s initial comments.

“The amount of itemized deductions a taxpayer claims depends critically on if they own or rent a home, if their state has an income tax, and their amount of charitable giving,” he said in an e-mail.

He pointed out that only one-third of all taxpayers claim itemized deductions, meaning two-thirds of all taxpayers would not be affected by this proposal.

In a statement Tuesday, the Romney campaign emphasized that Romney was only speaking in “illustrative example,” and not describing a definitive policy proposal.

“Governor Romney’s tax reform plan will jumpstart economic growth, cut the tax burden on the middle-class, and lower tax rates across-the-board,” said spokeswoman Amanda Henneberg in a statement. “He will pursue revenue and distributional-neutrality in reforming the tax code. There are a range of policy options, Gov. Romney referenced one illustrative example, to achieve these goals.”

The Obama campaign signaled their skepticism of Romney’s proposal Tuesday.

During an interview Tuesday on MSNBC, former White House press secretary Robert Gibbs said he hoped “Romney will take some of the time that Paul Ryan didn’t want to take in his interview this weekend and try to explain the arithmetic behind their budget.”

“You know, Paul Ryan said it would take too long to explain their budget plan,” Gibbs continued. “The problem isn’t the time and the explanation. It’s the math that’s involved to make the statements that Mitt Romney and Paul Ryan have said line up to being anything close to the truth. And I think that Gov. Romney will likely, whether he likes it or not, have an opportunity to try to explain how you pay for a $5 trillion tax cut for the wealthy and not have it end up — as every study has shown — raising taxes on middle-class families.”

-This post was updated at 5:50 p.m.

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