"Reduce spending in the tax code"

Last week (April 13, 2011), President Obama said, in his budget/fiscal policy plan speech, that one thing he wants to do is "reduce spending in the tax code, so-called tax expenditures. ... the tax code is also loaded up with spending on things like itemized deductions. And while I agree with the goals of many of these deductions, from homeownership to charitable giving, we can’t ignore the fact that they provide millionaires an average tax break of $75,000 but do nothing for the typical middle-class family that doesn’t itemize. So my budget calls for limiting itemized deductions for the wealthiest 2 percent of Americans -- a reform that would reduce the deficit by $320 billion over 10 years."

That line - "reduce spending in the tax code" was confusing to many. John Stewart puzzled over it, saying it was "code" for tax hike (4/14/11 on YouTube).

I'm not surprised - it does sound odd to think that there is spending in the tax code, but as I've posted here several times (such as 10/16/10 and 3/29/11), that is what special deductions, exclusions and credits that are not necessary for measuring taxable income, are. Instead of the government giving individuals a grant for home ownership, for example, you get a deduction which lowers your tax bill. What is odd about the "spending in the tax code" is that it doesn't work the same way a government grant would. A government grant would likely give more money to people with lower inocme. In contrast, a tax deduction gives more money to people with higher incomes (the higher tax bracket makes the deduction worth more to them).

And, when it comes to itemized deductions, only 1/3 of individuals itemize so 2/3 don't claim those deductions (medical, state taxes, charitable contributions, mortgage interest). They take the standard deduction instead.

President Obama has not talked about removing any itemized deductions or modifying any of them. Instead, he has proposed limiting their benefit to 28%. That still provides a significant benefit to high income taxpayers. He has not talked about other tax expenditures (outside of itemized deductions). I think serious tax reform to simplify and rationalize the system will require reducing the number of deductions, credits and exclusions - and lowering the tax rate. Generating funds to lower the deficit should also consider the spending in the tax code that doesn't need to be there.

What do you think?

"Reduce spending in the tax code" 2011-04-18T10:35:00-07:00 Rating: 4.5 Diposkan Oleh: Unknown