Another Option for Balanced Deficit Reduction
This week we’re taking a closer look at the $1 TRILLION in loopholes, deductions, giveaways, and credits in our tax code that could be eliminated, modified, or cut through a tax reform process. This would generate new revenue that we can use to further reduce the deficit, protect vital programs like Medicare and Social Security, and make investments in the middle class.
The tax reform idea we’re looking at today addresses one of the inequities in our tax code that helps stack the deck in favor of the wealthy. Currently, the tax code is structured in such a way that the wealthiest Americans get outsized deductions that they don’t need and, increasingly, that we just cannot afford.
Here’s how it works. There are numerous provisions of the tax code that are meant to encourage or subsidize something. The mortgage interest deduction, for example, is meant to encourage people to buy homes. And the wealthier are likely to have bigger homes (or more than one), which means bigger mortgages and bigger deductions. The problem is that the same exact same itemized deduction ends up being worth more to someone in the top brackets than it is to those in lower tax brackets.
Here’s what a $10,000 deduction could be worth for someone in various tax brackets:
- 39.6 percent: $3960
- 28 percent: $2800
- 15 percent: $1500
Luckily, there’s a fairly straightforward solution to this problem. In his most recent budget, the president proposed addressing these overly generous deductions by limiting them for the wealthiest Americans. The wealthiest Americans would be able to claim the same value from deductions that a middle-class taxpayer in the 28 percent bracket gets, but not more.
Limiting deductions for the wealthy would not only make our tax code more progressive, it would raise a substantial amount of revenue: $521 BILLION over the next ten years, according to an estimate from last year.
The president’s proposal and a recent tax plan released by the Center for American Progress and other economic luminaries both accomplish the goal of making deductions more fair while also raising new revenues.
BOTTOM LINE: We don’t need to gut Medicare or slash Social Security to reduce the deficit. Three-quarters of our deficit reduction so far has come from spending cuts, so common sense proposals like limiting extra deductions for the wealthy will help us further reduce the deficit in a more balanced manner.
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