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Friday, November 28, 2014         

ANALYSIS


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Steep path to raise big revenues by cutting loopholes

By Annie Lowrey

New York Times

POSTED:



WASHINGTON » Whether to raise revenue through increasing tax rates or cutting loopholes has become a central sticking point in the negotiations on a major debt deal.

The White House has drawn one line in the sand: It argues that tax rates must go up on income above $250,000 a year, as reducing tax breaks for the affluent cannot on its own raise the $1.6 trillion in additional revenue it seeks. Congressional Republicans have drawn another line: They might accept higher revenue, but only through the reduction of tax breaks.

But is it even possible to raise $1.6 trillion from wealthy households without changing tax rates? Experts say it is. But doing so might be politically infeasible and hugely unpopular, as it would involve wiping out nearly every deduction, credit and preferential rate those affluent households claim.

"Getting $1.6 trillion on the individual side, only through rolling back tax expenditures?" said Donald Marron, the director of the Tax Policy Center, a Washington-based research group. "It's a heavy lift."

Wiping out all tax expenditures — the official name for the deductions, credits and other loopholes addling the tax code — for the top 2 percent of earners would raise about $2 trillion over 10 years. (Tax expenditures for all households cost the government about $1 trillion a year, as middle-class and low-income families also benefit.)

But doing so would mean that a family earning just more than $250,000 a year might face a sharply higher tax bill than a household earning just less than that amount. A phase-in, which most analysts consider unavoidable, might slash $300 billion from the revenue pot, leaving roughly $1.7 trillion, just more than the White House seeks.

That means that any proposal raising $1.6 trillion would involve getting rid of nearly every loophole or break in the code for high-income families — not just itemized deductions but also preferential rates on investment income and every tax credit the wealthy can currently claim.

There would be no or close to no deduction for charitable giving, raising the ire of wealthy donors and nonprofit directors. The home mortgage interest deduction would vanish, hurting the housing market just as it has started to turn around. Preferential tax treatment of capital gains and dividends would disappear, probably throwing the markets into a sell-off. The top 1 percent of earners might see their after-tax income fall by as much as 19.8 percent, according to calculations by the Tax Policy Center.

This is a large part of the reason that the White House has argued for allowing the top two marginal rates to rise to the Clinton-era levels, with a top rate of 39.6 percent. Such an increase would reduce the deficit by nearly $1 trillion over 10 years and allow for a deal that caps deductions, rather than eliminates all of them.

Although the politics remain difficult, tax experts say they can identify a number of plausible routes to agreement between Republicans and Democrats.

For one, the White House could agree to a lower revenue target — say, $1 trillion over 10 years, or $1.2 trillion — allowing for a more moderate package of tax increases on the wealthy.

Second, tax rates could rise for the top two brackets — not to their Clinton-era rates but to a few percentage points below them. A top rate might climb to 37 percent, rather than 39.6 percent, from the current 35 percent. That would still increase revenue by hundreds of billions of dollars over the course of 10 years, making the rest of the tax math easier.

Republicans and Democrats might also agree to a broad cap on all deductions for a household, an option that negotiators on the Hill said holds promise for both sides. For one, limiting deductions would avoid the thorny negotiations on which tax expenditures to eliminate.

With some higher rates and limits to loopholes, experts say many different plans could raise an additional $1 trillion to $1.6 trillion in revenue over 10 years.

The centrist research group Third Way ran the numbers on a White House proposal to let the Bush-era tax cuts on the top two rates expire, for example. Third Way also imagined increasing the estate tax, limiting the value of itemized deductions and carrying out the "Buffett Rule," which ensures that households earning more than $1 million a year pay at least 30 percent of their income in taxes. That package of changes increased revenue by about $1.6 trillion over 10 years.






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