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IF TAX RATES CAN'T GO UP, MAYBE DEDUCTIONS CAN GO DOWN

Posted by Admin Posted on Feb 12 2011

In December, President Obama reached an agreement with House Republicans to extend the 2001 tax cuts for all taxpayers for two years - to 2012.  In exchange, the Republicans agreed to extend unemployment benefits and some stimulus spending.

On Monday, the White House should release its 2011-2012 budget proposal.  The budget is expected to revisit some proposals from last year that didn't make into this year's budget, including a proposal to limit the value of itemized deductions to 28% for taxpayers in the 33% and 35% tax brackets.

Under current law, if a taxpayer in the 33% bracket claims an itemized deduction, he saves 33 cents in federal income tax for every deductible dollar.  Under the proposal, that taxpayer would only save 28 cents for every deductible dollar.  This proposal died last year under intense lobbying pressure from the real estate industry and charitable organizations.  The real estate industry thought the reduction would make housing less affordable, while charities worried that donations would suffer if the federal government subsidized less of the cost.

This time around, though, the administration is expected to emphasize that the economy is starting to recover, that this change would raise as much as $300 billion dollars over the next ten years, and that the increased revenue would reduce the U.S. deficit.  However, conservatives can be expected to counter that this is a tax increase.  At which point the White House is likely to duck for cover behind the recent recommendations of the bipartisan Deficit Reduction Commission, which recommend cutting tax deductions.  The Commission also recommended cutting tax rates, but it was widely understood that the net result would be a tax increase.

The politics of this proposal are almost as complex as the economics.  The President was criticized by Democrats for moving the tax increase for the rich into the 2012 election cycle.  But increasing taxes on the rich has support among the larger population, and the White House may be looking to make the "fairness"issue a major part of the 2012 campaign.

And there's another 18 months of positioning to go until the 2012 conventions!

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