"If the Obama administration's goal were truly fairness, it could propose an increase in the average tax rate on higher-income earners without raising marginal rates—for example, by limiting deductions," writes former Bush economic adviser Glenn Hubbard. Hubbard should do a little research: The Obama administration has twice proposed returning itemized tax deductions to their Reagan-era levels. Instead of claiming 35 percent of a charitable contribution as a deductible, for instance, a wealthy tax-payer would deduct 28 percent, the same as someone in a lower tax bracket. It makes sense; why should the charitable contributions of the wealthy be worth more than someone's in the middle-class?
This idea fell flat in Congress thanks to opposition from Republicans and moderate Democrats. Were it enacted, however, it would provide $291 billion dollars in revenue over 10 years, according to the Treasury's estimates. Meanwhile, increasing capital gains and dividend taxes to 20 percent -- the policy Hubbard opposes -- only raises $105 billion over 10 years. Hubbard is right that limiting deductions is a more efficient way to raise money, and indeed a fairer one. This likely has something to do with the fact that limiting deductions has failed politically, but increasing capital gains and dividend taxes remains on the table.
That's not the only idea that Hubbard gets wrong. He suggests that capital gains and dividend taxes could jump up to nearly 40 percent, but that's not what the Obama administration supports; they're committed to a 20 percent rate, lower than the status quo for much of the 1990s, clearly a time when investment was prolific. Without other, feasible options, the administration has concluded that the fiscal benefits of this tax outweigh its economic costs.
It doesn't seem that Hubbard jumped to the fore and penned many articles in support of the deduction limit when the president introduced it in his budgets this year or last. Strange, indeed, that he's only out here advocating for a fairer tax -- and one that seems politically impossible -- in order to stop a much-needed revenue increase that might make it over the line.
More useful reading: James Suroweicki talks about the need for a new tax bracket targeting the super wealthy.
-- Tim Fernholz
