The Bucket/List

October 2nd, 2012

Inspired by Mitt’s “bucket” approach to limiting tax deductions.

 

“As an option you could say everybody’s going to get up to a $17,000 deduction, and you could use your charitable deduction, or your home mortgage deduction, or others — your healthcare deduction. And you can fill that bucket, if you will, the $17,000 bucket that way. And higher income people might have a lower number.” – Mitt Romney today in Denver

 

When voters insisted

Mitt’s canceled loopholes be listed,

Mitt said “f*** it,”

I’ll just use a bucket.

 

(Just parenthetically,

The President proposed limiting deductions almost identically.

Perhaps before the debate ends

They’ll become best of friends.)

***

Since I believe in giving praise when due, I have to admit that this bucket makes sense from both a tax policy and political perspective. From the tax policy perspective, if you believe that some people are taking too many deductions, then it makes sense to limit the total of those deductions, rather than individual ones. In addition, it’s a lot more administratively efficient and easier to calculate. And finally, this approach retains the deduction’s incentive effect, possibly even strengthening it relative to tax revenue dollars foregone. How? Because people make decisions based upon first-level analysis. When you buy a house, you calculate your ability to pay based on how much mortgage interest you can deduct, but very few (if any) people will include the impact of other future deductions lost in that calculation. (Psychologically, it’s similar to when you subtract the mail-in rebate to calculate how much you’re “really” paying for that flat-screen, but then never get around to mailing it in.)

From the political perspective, the “bucket” approach allows Romney to effectively cut all deductions without having to cut any deductions. In other words, it allows Mitt to honestly (albeit misleadingly) say that he’s not touching your home mortgage deduction, or your health insurance exclusion, or state income tax deduction. No, he’s not touching any of them, but he is limiting their combined total. That’s political genius…and I think no coincidence that he’s floating this approach the day before his and the President’s first debate.

However, the approach does have several downsides:

1) According to the Tax Policy Center, it only fills $1-2 trillion of Mitt’s $5 trillion tax revenue gap. (Still, that’s better than nothing.)

2) Ability to pay is one of the tax code’s key principles, and that is part of what deductions represent. For example, the code conceptually treats good health as the baseline for determining taxable income. If someone needs $20K in medical treatment to earn $100K in income, how is that person different from someone who needs no medical treatment and earns $80K. Now, in theory, the tax code treats those people the same (not exactly, since there are already deductibility limits that affect the calculation), but further limiting deductions would change that. (NB: One way to get around that problem would be to have two “buckets,” one for ability-to-pay deductions, and one for economic-incentive deductions, and only limit the latter.)

One thing Mitt said that I do disagree with: deduction phase-out. That sounds like an egalitarian, progressive idea, so at first glance it may seem strange that Mitt is for it and I’m against it.

My argument against those phase-outs is that they’re dumb, and no more than an inefficient, annoying, and unfair way to pay lip service to egalitarian impulses instead of just raising rates. If  people earning more should pay more, why not just raise their rates by 0.01% instead of fooling around with their deductions. But what’s worse than the annoyance of having to look up extra numbers on a table and calculate your phase-out percentage is the unfairness and economic randomness that phase-outs create.

For example, let’s say that Romney’s $17,000 deductions bucket is phased out over a $85K income range on a 5:1 basis. That means that someone who earns $5 over the baseline would lose $1 in deductions. If their nominal marginal tax rate is 30%, that increases their real effective marginal rate to 36%. That effective rate would then apply to the next $85K in income, but after than their marginal rate falls back down to 30%. That not only makes no economic sense: it’s unfair and regressive. One suspects that Republicans like Mitt favor phase-outs for that very reason: it allows their super-rich supporters to maintain lower tax rates, while upper middle class folks in the phase-out range make up the difference. (Note: The actual effect is the exact opposite of what some in the media are referring to as an anti-rich policy proposal: in fact, it benefits the rich at the upper middle-class’s expense.)

So Mitt, while I do understand your choice of a bucket instead of a list, I’d appreciate it if you would make the above-referenced modifications.

Here’s Mitt’s statement and Ed’s discussion tonight thereof. Ed also hits Paul Ryan for his “I don’t have time” comment and Romney for Bain, Detroit, and Mitt’s long list of lies and misinformation.
 

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Here’s a scene from the movie which inspired our title, The Bucket List. It’s about a super-rich, uncaring white guy and a smart, friendly black guy that initially don’t get along, but then become best of friends. Maybe Mitt and Barry can do the sequel. After all, President Obama does have a similar proposal to limit deductions, but Congress keeps voting it down.

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4 Responses to “The Bucket/List”

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