Americans won't give up tax breaks? Bribe them!
Offering temporary tax breaks to cut down permanent ones could be a way to 'bribe' taxpayers to give up tax breaks.
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We could phase in a version of Feldstein’s plan by offering a “tax break credit” of 10% of AGI for tax year 2011 in exchange for eliminating tax breaks worth 5% of income. The credit rate could be phased down to 2% of AGI over 5 years. For the first three years, this would be a tax cut compared with current law and provide a needed economic stimulus . To make the stimulus even more effective and help those most in need of aid, the first $5,000 for joint filers could be made refundable ($2,500 for single returns). That amount could also be phased down over time. This would raise taxpayers’ incomes by roughly half a trillion dollars in 2011, and smaller amounts in 2012 and 2013, providing a helpful prod to the economic recovery.
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The bottom line is that this plan would boost the economy in the short term, substantially reduce the deficit over the long term with tax rates, and significantly simplify the tax system.
Since I’m a tax geek, I want to get into some technical stuff below. Non-geeks can stop reading now.
Unlike Feldstein’s plan, which caps tax breaks at 2% of AGI, a simpler approach would be to simply deem tax breaks equal to that amount. Set a floor on the credit equal to 15% of the standard deduction and then the standard deduction can be eliminated also. (In Feldstein’s plan, taxpayers have to decide whether to take the standard deduction or itemize subject to the AGI cap.) In addition, the AMT should be eliminated. It wouldn’t cost much if major “preference items” like the state and local deduction were also eliminated.
Some provisions would have to be phased in. For example, part of the plan should be to cap or eliminate the tax exclusion for employer-sponsored health insurance. There’s a near consensus that this exclusion is poorly targeted and contributes to rising healthcare costs. However, it wouldn’t be possible to limit the exclusion in 2011 because employers are not required to measure and report the value of health insurance benefits until 2012.
Also, it would be unfair to prevent taxpayers from taking tax breaks they had counted on this year. Thus, they should be allowed to elect to claim all of their tax breaks in 2011 in lieu of the credit. Most taxpayers would not make this election, but this transition rule is probable necessary.
An earlier version of this post was originally published on my Forbes blog.
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