Study: Ending deductions pays for 4 percent tax cuts

10/13/2012 12:00 AM

10/13/2012 2:08 AM

Repealing all itemized deductions in the U.S. tax code would pay for only a 4 percent cut in income tax rates, according to an estimate from the nonpartisan scorekeeper for Congress that casts doubt on Republicans’ ability to finance lower income-tax rates with base broadening.

The analysis by the Joint Committee on Taxation shows the arithmetical difficulty of an approach that assumes long-favored tax breaks such as deductions for mortgage interest and charitable contributions could be repealed instantly and completely. Republican presidential nominee Mitt Romney proposes a 20 percent income-tax cut and says he would pay for it by limiting tax deductions, credits and exemptions.

There are some important differences between Romney’s approach and the JCT analysis that make it difficult to compare the 4 percent finding in the study with Romney’s promise of a 20 percent tax cut. Much of the base broadening in the analysis pays for some changes that Romney assumes in his starting point and for policies from the 2009 stimulus law that he may not want to extend. That means he would be able to use the changes to deductions to cut rates by more than 4 percent.

“This JCT study is but one analysis of one hypothetical tax reform option,” Antonia Ferrier, a spokeswoman for Sen. Orrin Hatch, the top Republican on the Senate Finance Committee, said in an emailed statement. “Those who seek to use the study to kill tax reform efforts should be accountable for the defects of the current system.”

The estimate also assumes that the George W. Bush-era tax cuts would expire Dec. 31 for all income levels, meaning that the starting point for the analysis presumes a tax increase that neither party supports. Thus, the top rate achieved under the analysis would be 38.02 percent.

In the approach in the JCT analysis, the base broadening also pays for repealing the alternative minimum tax and extending provisions of the child tax credit and earned income tax credit.

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