How do you permanently eliminate $800B in Tax-deductions? It is possible and it is easy to provide the specific answer. Where are the specifics?
I for one am encouraged that we will get a bevy of specific answers over the next 30 days. I am glad to see the public negotiations going on between the elected officials because this means there are substantive private negotiations taking place as well.
Recently two plans for deficit deduction were presented publicly. Both plans have a revenue component. One asks for $1.6T in revenue by allowing the current temporary tax-rates to expire and return to 1994 levels. If this happens , presto , new revenue appears! As long as there are no new tax-cuts, the new revenue can work to reduce the deficit.
The other plan leaves those tax-rates in place and instead seeks to raise revenue by eliminating $800b in tax-deductions. By keeping all of the tax-rates in place, the deficit grows by $1.6T so the elimination of $800B in deductions still requires $800B more in savings or cuts or deduction eliminations from somewhere else. The result of this theory produces zero net new revenue. Not a dime since the $1.6T would be used to pay for $1.6T in tax-cuts.
In the words of Sesame Street: ” … one of these things (revenue plans) is different from the other”.
Today, I am going to focus on the revenue-only portion of the the new House plan since the President’s revenue plan is already very specific – return to 1994 tax rates on all income over $250k. Let Capital Gain, Dividend , and Inheritance tax rates return to 1994 levels as well. We all understand how he gets to $1.6T. What we do not know is how the House Speaker gets to his new revenue target. Let’s see if we can gain more clarity.
I would like to focus on the area of deductions being discussed since one of the plans has now provided a written revenue target of $800b over 20 years. The simple concept is to eliminate deductions totaling a specific targeted amount. What is not clear is which deductions are being eliminated and which taxpayers is being impacted.
In order to assist you, I am providing an excellent tool created by the Washington Post. This tool allows anyone to see the specific value of all of the current deductions – broken down by IRS tax sections. Within about an hour of using this tool, you will have answers to just about every one of your questions related to what is normally a complicated discussion.
[Update: Here is a link to a great resource which details all 172 tax deductions. http://www.washingtonpost.com/wp-srv/special/politics/tax-code-break-by-break/ ]
The total value of all 172 individual and corporate tax deductions is approximately $1.1 trillion per year. Which deduction must be cut in order to achieve the goals of the House Leaders new plan without retarding growth, cutting jobs, or driving up the national debt?
The value of the top 25 deductions for corporations, investors and business interests is approximately $460 billion or nearly 42% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).
You do the math.
The top 25 tax deductions enjoyed by individual non-business specific taxpayers by random order of value are:
1. Mortgage Deduction – $ 88.7 billion
2. Earned Income tax credit – $ 62.5 billion
3. Employer Plans. – $ 42.2 billion
4. IRA Plans – $ 15.0 billion
5. Charitable Contributions – $ 39.6 billion
( non-health )
6. Charitable Deductions – $ 4.5 billion
( health only)
7. Medical Savings Accounts – $ 1.9 billion
8. Capital Gains Exclusion – $ 27.6 billion
on home sales
9. Credit for homebuyer expense – $ 10.4 billion
10. Step-up basis of Capital Gain $ 50.9 billion
11. Additional Deduction for elderly – $ 2.5 billion
12. Capital Gains (except agriculture- $ 37.6 billion
timber, iron ore and coal
13. Exclusion of interest on Life – $ 21.2 billion
14. Property Tax Deduction. – $ 19.3 billion
15. Parental personal exemption – $ 3.0 billion
for students age 19 & older
16. Charitable contributions – $ 4.5 billion
( education only )
17. Exclusion of scholarship and – $ 3.0 billion
18. Credit for child & dependent – $ 1.9 billion
19. Making work pay tax credit – $ 44.0 billion
20. American Opportunity tax credit – $ 14.4 billion
21. Lifetime learning tax credit – $ 3.9 billion
22. Child Credit – $ 42.5 billion
23. Exclusion of taxes/benefits for – $ 13.3 billion
Armed Forces personnel
24. Deductibility of non-business – $ 37.7 billion
state & local taxes
25. Discharge of mortgage debt – $ 1.4 billion
The value of the top 25 deductions for individuals is approximately $460 billion or nearly 42% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).
The top 25 tax deductions enjoyed specifically by corporations or specifically high-earning businesses and investors by random order of value are:
1. Employer contributions for health – $173.0 billion
2. Employer Plans – $ 42.2 billion
3. KEOGH IRA Plans – $ 15.0 billion
4. Credit for small business. – $ 2.6 billion
health expenses (additional)
5. Interest exclusion on – $ 3.6 billion
hospitable construction bonds
6. Self Employed Medical. – $ 6.2 billion
7. Additional Deductibility of – $10.0 billion
Medical Expenses (large)
8. Energy Production Credit. – $ 1.6 billion
9. Alcohol Fuels Credit. – $ 3.1 billion
10. Special Credit -Oil & Gas. – $ 4.2 billion
11. Credit for low-income. – $. 6.0 billion
12. Accelerated Depreciation for – $17.5 billion
machinery & equipment
13. Exclusion of net inputed – $47.0 billion
14. Graduated corporation – $ 3.3 billion
income tax rate
15. Deduction for US production. – $13.8 billion
16. Exemption from passive loss – $10.9 billion
rules for rental loss
17. Carryover basis of Capital – $ 4.8 billion
gains on gifts
18. Expensing of certain small – $ 6.7 billion
19. Graduated Corporation – $ 3.3 billion
Income tax rate
20. Treatment of qualified. – $23.6 billion
21. Accelerated depreciation on – $13.0 billion
buildings other than housing
22. Exclusion of interest on bonds – $ 2.4 billion
for educational facilities
23. Employer provided child care – $ 1.4 billion
24. Credit for increasing research – $ 3.9 billion
25. Deferral of income for foreign – $41.4 billion
The value of the top 25 deductions for corporations, investors and business interests is approximately $593 billion or nearly 55% of the total value of all available tax deductions, tax credits and tax loopholes -($1.1 trillion).
Ok my friends, you now have the exact same data the politicians have. You can now decide exactly what to keep and what to cut.
You may have heard some in Congress have already stated they will not cut Mortgage interest deductions, child education deductions, employer healthcare deductions, dividend income deductions, or charitable contributions. As you can see, it gets much harder to achieve $80B per year in tax-deduction savings (approx $800B over 10 years), if you do not affect the aforementioned deductions.
You may have also heard about a concept that Congress would have a limited deduction “bucket” of $17k, $25k, or even $50k. This means an individual or Corporation can only take a maximum of deductions in a single year. This idea is not in writing anywhere so it is nothing to be taken seriously at this point. Only when Congress settles on a real number in the bucket can anyone evaluate whether the bucket is big enough to work.
You now understand the value of the top 50 deductions which make up over 90% of all 172 deductions. I would be nice to specifically see how those offering an $800B plan to eliminate or cut deductions are getting there. To be very clear, cutting $800B in deductions while leaving all tax-rates in place still adds at least $800B to the deficit so we still have not solved the deficit challenge.