Posted by Bob Lord
The so-called fiscal cliff negotiations took a turn a few days ago when Speaker Boehner acknowledged that more tax revenue needed to come from those at the top, but took the position that the revenue must come from closing loopholes and capping deductions, not from raising rates. Democrats took the position that there is not enough revenue to be raised simply by closing loopholes and capping deductions, thus appearing to concede the point that limiting deductions is better policy than raising rates.
I beg to differ. Here are three situations that should be presented to Mr. Boehner as a preface to him defending his position:
Sam and Alice have taxable income of $250,000 per year, taking into account $20,000 that they give annually to Smile Train, a charity, which allows 80 kids born with cleft lip or cleft palate to have a chance at a normal life. John and Jane have taxable income of $366,666, with no charitable deductions. If we cap charitable deductions at $10,000 and leave rates at 2012 rates, Sam and Alice pay an extra $3,500 in 2013. If we allow the Bush tax cuts for those above $250,000 to expire but don't limit deductions, John and Jane pay the extra $3,500. Which is the better policy?
Sam and Alice have taxable income of $250,000 per year, taking into account a deduction for $10,000 that they pay in state and local taxes. John and Jane have taxable income of $366,666 and live in a state where they are not required to pay income tax. If we eliminate the deduction for state and local income taxes, Sam and Alice pay an extra $3,500. If we revert to the pre-Bush rates on income over $250,000, John and Jane pay the $3,500 in addtional tax. Which is the better policy? Does it really make sense to charge Sam and Alice $3,500 in federal income tax on income they are compelled to pay over to their state's government, simply so John and Jane can pay less tax on the income they actually can control and enjoy?
Sam, a young emergency room doctor who works at an inner city hospital, and his wife, Alice, have taxable income of $250,000 per year, taking into account a deduction $20,000 of mortgage interest. Sam also pays interest on $300,000 of student loans incurred for his medical education, most of which is not deductible. John and Jane, a retired couple, have $366,666 of taxable income from their bond portfolio. They own their house free and clear. If we limit the mortgage interest deduction to $10,000, Sam and Alice pay an additional $3,500. If we allow the rates on taxable income in excess of $250,000 to revert to pre-Bush rates, John and Jane pay the additional $3,500 in tax. Which is the better policy? If our objective here is to avoid passing our crushing federal debt to younger and future generations, why would we force the younger homeowners, who still are paying their mortgages, to bear the burden of reducing the debt, in order to allow the older generation, who reaped the benefits of the debt while it was incurred, to get a free ride?
Your thoughts Mr. Boehner?