Summers: Be Careful About Capping Tax Deductions

Lately, both Republicans and Democrats have warmed to this element of the Romney tax plan. The ex-Treasury secretary says it's not enough.

As talk about deficit reduction has heated up after the election, policy wonks have been warming to the idea of putting a hard cap on tax deductions as a way to raise revenues without raising rates -- a compromise that could please both Democrats and Republicans. The Romney campaign pushed it as part of their tax plan, and because the rich tend to deduct a whole lot more from their returns than the middle class -- factory workers aren't exactly getting libraries built in their name -- it's an extremely progressive way of tackling the problem, as The Atlantic's Matt O'Brien noted in a recent piece.

But speaking at the Washington Ideas Forum today, former Treasury secretary and Obama economic advisor Larry Summers cautioned that simply putting a hard ceiling on deductions could have disastrous consequences for charity, by killing the incentive for the rich to give. Instead, he suggested that taxpayers should still be allowed to deduct a percentage of every dollar they donate from their returns -- just a much smaller percentage than they're currently allowed.

Speaking more generally about the coming tax debate, Summers suggested that it wasn't realistic to believe we could raise enough tax revenue to cut the deficit in a meaningful way just by eliminating loopholes and deductions (or broadening the base).

"I think that base-broadening should absolutely be part of what we do," he said. "I don't think you'll find that it's likely to be realistic, either politically or substantively, to raise as much money as we need to raise from upper-income people only with base-broadening."

In other words, we're going to have hike upper-income tax rates to make any real progress. Get ready for a big fight.




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Jordan Weissmann is a senior associate editor at The Atlantic.

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