How Congress can cap tax breaks

It's possible to reduce tax subsidies for wealthy Americans and reduce the deficit. Here are three proposals how:

Sooner or later, Congress will realize it needs new revenues to help balance the budget, and trimming tax subsidies is the way to get them. But will it tackle individual preferences, such as the mortgage interest deduction, one at a time? Or, will it try to limit the political bloodshed and go after these tax breaks across-the board?

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The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. The Center is made up of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government. TaxVox is the Tax Policy Center's tax and budget policy blog.

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The Tax Policy Center has looked at three ways to limit the benefit of tax subsidies for high-income households. Each would raise billions in new revenues?money that could be used to both reduce the deficit and cut tax rates. And each would be quite progressive. However, they?d work very differently.

The first is the Obama Administration?s proposal to cap the value of itemized deductions at 28 percent. The second, called the Effective Minimum Tax, would require high income households to pay a rate of at least 21 percent on their Adjusted Gross Income (AGI) plus municipal bond income. The third is a modified version of a plan offered by Marty Feldstein, Dan Feenberg, and Maya MacGuineas that would limit the value of deductions and credits to 2 percent of AGI. Let?s take a look at each of them.

The Obama plan would raise about $165 billion over 10 years (I?m comparing each plan to current policy?that is, the taxes people pay today). According to this proposal, those in the 33 percent and 35 percent brackets could take all the same itemized deductions they do now, but their value would be capped at just 28 percent.

Obama would raise taxes on about 5.4 million housholds. About 95 percent of the new taxes would be paid by the highest-income 5 percent of households, although a handful of middle-class people would also get clipped. The average tax hike in 2013 would be about $2,800, and the top 0.1 percent would pay an average of about $54,000 more than they do today.

The Effective Minimum Tax (EMT) was developed by TPC?s Jim Nunns. It would operate something like the alternative minimum tax but would be imposed on a broader tax base and affect only top-bracket taxpayers. They?d figure their regular tax, calculate their EMT rate, and pay the higher of the two. This levy would raise about $170 billion over 10 years. Only about 400,000 households?all in the top 5 percent?would pay more tax. And they?d owe an average of $80,000 more. Those in the top 0.1 percent of income would pay much more than under the Obama plan?an average tax increase of more than $400,000.

Source: http://rss.csmonitor.com/~r/feeds/csm/~3/MGv9HNtLlfE/How-Congress-can-cap-tax-breaks

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