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Capping Individual Tax Expenditure Benefits

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  • Martin Feldstein
  • Daniel Feenberg
  • Maya MacGuineas

Abstract

This paper analyzes a new way of reducing the major individual tax expenditures: capping the total amount that tax expenditures as a whole can reduce each individual's tax burden. More specifically, we examine the effect of limiting the total value of the tax reduction resulting from tax expenditures to two percent of the individual's adjusted gross income. Each individual can benefit from the full range of tax expenditures but can receive tax reduction only up to 2 percent of his AGI. Simulations using the NBER TAXSIM model project that a 2 percent cap would raise $278 billion in 2011. The paper analyzes the revenue increases by AGI class. The 2 percent cap would also cause substantial simplification by inducing more than 35 million taxpayers to shift from itemizing their deductions to using the standard deduction. For any taxpayer for whom the 2 percent cap is binding, a cap would reduce the volume of wasteful spending and the associated deadweight loss. Even for those taxpayers for whom the cap is not binding but who are induced by the cap to shift from itemizing to using the standard deduction, the deadweight loss associated with deductible expenditures would be completely eliminated

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16921.

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Date of creation: Apr 2011
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Publication status: published as “Capping Individual Tax Expenditure Benefits”, (with Dan Feenberg and Maya MacGuinneas) in Tax Notes, May 2, 2011, p 505-509. NBER Working Paper 16921, April 2011.
Handle: RePEc:nbr:nberwo:16921

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Cited by:
  1. Robert P. Hagemann, 2012. "Fiscal Consolidation: Part 6. What Are the Best Policy Instruments for Fiscal Consolidation?," OECD Economics Department Working Papers 937, OECD Publishing.
  2. Jeffrey B. Liebman, 2012. "The Deterioration in the U.S. Fiscal Outlook, 2001–2010," NBER Chapters, in: Tax Policy and the Economy, Volume 27, pages 1-18 National Bureau of Economic Research, Inc.
  3. Cordes, Joseph J., 2011. "Re-Thinking The Deduction For Charitable Contributions: Evaluating The Effects Of Deficit-Reduction Proposals," National Tax Journal, National Tax Association, vol. 64(4), pages 1001-24, December.
  4. Douglas Sutherland & Peter Hoeller & Rossana Merola, 2012. "Fiscal Consolidation: Part 1. How Much is Needed and How to Reduce Debt to a Prudent Level?," OECD Economics Department Working Papers 932, OECD Publishing.
  5. Andrew A. Samwick, 2012. "Donating the Voucher: An Alternative Tax Treatment of Private School Enrollment," NBER Working Papers 18525, National Bureau of Economic Research, Inc.
  6. Leonard Burman, 2013. "Pathways to Tax Reform Revisted," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 155, Center for Policy Research, Maxwell School, Syracuse University.

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