Sunday, August 21, 2016

Why It’s So Hard to Get Rid of Tax ‘Loopholes’

Many of the biggest—and most popular—tax breaks benefit the upper-middle class

By Richard Rubin of the WSJ. Excerpts:
"the reality is that many of the biggest breaks are the ones that benefit the upper-middle class: itemized deductions. That’s why President Barack Obama and Democratic presidential candidate Hillary Clinton have proposed limits on high earners’ deductions. Republican presidential candidates Jeb Bush and Mitt Romney talked about deduction caps and Donald Trump is considering one, too.

Taxpayers can itemize deductions if their total exceeds the standard deduction—$6,300 for individuals and twice that for married couples. Some itemized deductions, such as the break for tax-preparation fees, are already subject to strict limits, but the big three are largely uncapped: state and local taxes, home-mortgage interest and charitable contributions.

Only about 30% of households itemize their deductions, and they tend to be higher-income households who have mortgages, significant state taxes and available cash to donate to charities.
To see exactly how much money is at stake and what happens if you repeal the breaks, here’s a tool from the Open Source Policy Center at the free-market-oriented American Enterprise Institute, which draws on ideas from technical contributors."
 Using the tool, we can see that the mortgage interest deduction saves about $6,600 for a someone (it seems like a household, actually) making $1 million or more a year. If you make between $500,000 and $1 million a year, it saves you about $4,100 per year. It starts falling rapidly after that.

If you make between $40,000-$50,000 you save just $68 a year and it just keeps falling as income falls.

If we look at all three of the big deductions, the households earning over $1 million per year save about $19,000 per year. If you make $50,000-$75,000, you save $218 and if you make $40,000-$50,000 per year you save $114 per year.

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