- Updated October 19, 2012, 7:18 p.m. ET
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Romney's Tax Deduction CapAn idea to finance reform and avoid political trench warfare.The Obama campaign and the press corps keep demanding that Mitt Romney specify which tax deductions he'd eliminate, but the Republican has already proposed more tax-reform specificity than any candidate in memory. To wit, he's proposed a dollar limit on deductions for each tax filer.
During the first Presidential debate, Mr. Romney put it this way: "What are the various ways we could bring down deductions, for instance? One way, for instance, would be to have a single number. Make up a number—$25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people. That's one way one could do it."
In an October 1 interview with a Denver TV station, Mr. Romney mentioned a cap of $17,000 and said "higher income people might have a lower number." His campaign stresses that these dollar amounts are "just illustrative" and that there are other ways to reduce deductions that in any case would have to be negotiated with Congress.
But details aside, the tax cap is a big idea, and potentially a very good one. The proposal makes economic sense to the extent that it helps to pay for lower marginal tax rates. Lower rates with fewer deductions improve the incentive for investing and taking risks based on the best return on capital rather than favoring one kind of investment (say, housing) over another. This would help economic growth.
The idea may be even better politically. The historic challenge for tax reformers is defeating the most powerful lobbies in Washington that exist to preserve their special tax privileges. Among the biggest is the housing lobby that exists to preserve the mortgage-interest deduction—the Realtors, home builders, mortgage brokers and the whole
Fannie Mae FNMA -0.73% gang.
But don't forget the life insurance lobby (which benefits from the tax exclusion on the equity buildup in policies), the tax-free municipal bond interest lobby, the charitable deduction lobby and more. Each one will fight to the death to preserve its carve-out, which means that reformers have to engage in political trench warfare to succeed.
This is one reason President Obama wants Mr. Romney to be more specific: The minute he proposed to limit the mortgage-interest deduction, the housing lobby would do the Obama campaign's bidding by running ads against Mr. Romney's plan. Mr. Romney is right not to fall for this sucker play.
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Romney's Tax Deduction Cap
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Originally Posted by gabosaurus
