As a matter of interest group politics, I think Mitt Romney’s idea of capping tax deductions at $17,000 rather than eliminating specific deductions is a very cleevr idea. But it doesn’t get around the fact that revenue-neutral tax reform that preserves low taxes on investment income amounts to a big middle class tax hike. Brian Beutler and the Brookings Tax Policy Center have the goods on this particular iteration of reform, and you can see the chart above.
Now if you want to understand the distributive implications of different tax ideas you have to pair them with spending. Doing this kind of reform to raise the revenue needed to pay for, say, health insurance subsidies would still be progressive in its overall distributive impact. Doing it in order to finance cuts in marginal income tax rates, however, amounts to raising taxes on the middle class in order to cut taxes on the rich. As I’ve said several times before, there are very sound reasons to think that kind of regressive tax shift would be a pro-growth policy but the Romney campaign resolutely refuses to spell out its reasoning.
The underlying political issue is that the reason normal people like low taxes is that they like having more money. But the reason right-leaning economists like low taxes is that they create incentives to work and invest. If you’re interested in the latter question, it’s really only the marginal rates that matter. But if you’re interested in the former, deductions are very relevant.
All in all, I take the fact that the entire DC discussion about tax reform is great illustration of the fact that voters don’t really want big change. It sounds nice to complain about how the tax code is “too complicated” and should be made “simpler” but at the end of the day what people really care about is paying less taxes rather than more. And in most cases, reform leads to paying more taxes.
