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Sucker Bait: Tax Rate Cuts for Lost Deductions

Romney’s campaign musings about how he would cut income tax rates by 20 percent (when half of Americans don’t even pay income taxes) has now floated the ultimate loser for all tax paying Americans. This is a $17,000 limit per person [1] for all deductions including mortgage interest, charitable, and state taxes. The concept was first floated by Obama to limit charitable deductions to a maximum rate of 28 percent for high income taxpayers, even though marginal tax rates are at 35 percent and may go to 39 percent at the end of this year. Once the principle is established to curtail deductions, future congresses can then cut them more and more.

This was the left’s attempt to get the camel’s nose under the tent, that is to start curtailing deductions, especially for large charitable and educational foundations. They have quickly jumped to note “bi-partisan” support for their agenda, “Romney is now admitting that middle-class tax increases on housing, health care and charitable deductions are on the table,” said Adam Fetcher, [1] a spokesman for Obama.

Tax deductions (denounced by the left as “loopholes”) are infinitely safer and more lasting than any cuts in tax rates which can easily be raised for the next war or crisis by any new Congress. Deductions, the large ones left, are for home mortgage interest, state income taxes, and charitable deductions. They are supported by all sorts of interests. These include employees of non-profits, homeowners, residents of high income tax states such as New York and California, charities, real estate brokers and a host of other Americans. Raising tax rates on the wealthy (over $200,000 income) is only opposed by a minority of Americans who actually pay these taxes.

Examples of higher rates after losses of deductions are legion. Former President Bush (41) and Clinton raised rates after Reagan cut out deductions supposedly in return for lower rates. Bruce Bartlett details the recent history in his book, The Benefit and the Burden [2]. He writes how Reagan reduced the top rate to 50 percent and then, with the Tax Reform Act of 1986, took away many tax preferences in return for reducing the rate to 28 percent. Subsequently George H.W. Bush raised it to 31 percent and Clinton then raised it to 39 percent but none of the tax preferences were reinstated (and the temporary decline to 35 percent is scheduled to end this December). With the next financial crisis they could easily be put back to 50 percent. Although most of the agenda for higher taxes comes from the left, a contingent of Republicans [3] also support higher taxes if the money goes for more “defense.”

As an aside to the above Bartlett explains a forgotten feature of Clinton’s tax increase to 39% during the prosperous 90’s, Obama’s proposal to copy it, is widely praised now as showing that higher taxes don’t affect economic growth. Clinton increased the threshold at which the highest rates kicked in from $80,000 to $250,000 of yearly income. In effect this meant that there was no increase for most taxpayers.

There is another major tax attack coming on non-profits–that is, charitable and educational foundations and their think tanks. These vast sources of wealth are looked upon more and more hungrily by Washington’s taxers. A good analogy is during medieval times when Europe’s kings desperately needed more money for their wars. They looked and saw church lands and monasteries as a vast source of untaxed wealth. It took them a while but soon they had seized such lands in most of Europe. The formerly wealthy Catholic church never recovered its former power.

Although most Americans would think of charity, medical research, theaters and schools as primary beneficiaries of tax deductible donation, political education is the area most vital to maintaining our freedoms from the warfare-welfare state. Think of the Cato Institute, the ACLU, the Federalist Society, the Bill of Rights Institute, the Heritage Foundation, Brookings, the Hoover Institution and the new state think tanks [4]. Tax deductible donations and bequests at death to these non-profits and hundreds of others like them allow independent sources of wealth able to challenge and (sometimes) limit government abuse and power. They don’t exist in most foreign nations precisely because governments don’t like them so there is no tax deduction for supporting them. They are much of the reason we have preserved most liberties in America.

If Romney wins election now and then becomes unpopular during the difficult times ahead, it’s quite possible he’d have a Democratic congress in 2014. Then we’d have the most toxic tax alliance, as history has proven time and again; a weak Republican president without strong anti-tax convictions and a Democratic congress pushing him to approve their agenda. Think about how this already happened with former presidents Nixon, Bush 41, and Gerald Ford, or Bush 43, who caved in with a medicare expansion, educational programs, and other big government agenda.

Jon Basil Utley is Associate Publisher of the American Conservative.

11 Comments (Open | Close)

11 Comments To "Sucker Bait: Tax Rate Cuts for Lost Deductions"

#1 Comment By Mr. Patrick On October 17, 2012 @ 4:57 pm

Romney may be a dough-faced pragmatist, but the idea of his signing a bill to tax the Heritage Foundation or Focus on the Family seems pretty far removed from the realm of the possible.

#2 Comment By SteveM On October 17, 2012 @ 5:06 pm

A counter argument is that many of the “political education” 501C non-profits are K Street fronts for Crony Capitalists. Moreover they pay their officers hundreds of thousands of bucks a year. Ed Feulner, president of Heritage makes a Million Bucks a year.

Beltway Neocon hacks like Frank Gaffney (300 Grand) and Keith Payne (400 Grand) are stooges for the Defense Contractors who foot their bills and give them fear monger scripts that boost weapons systems to plant in the media.

Nice work if you can get it. No P&L responsibilities, just run the Beltway gasbag circuit and clean up.

Your untaxed dollars at work…

#3 Comment By Hocking Hick On October 18, 2012 @ 8:28 am

Ummm… why not just a combination FED flat tax/State sales tax platform? Get rid of all deductions. Everybody pays.

#4 Comment By Root On October 18, 2012 @ 9:09 am

Step one: Argue for smaller government with plenty of tax loopholes.
Step two: Argue for larger special interests and lobbying groups to “protect” our freedom.

How’s that working for yah?

#5 Comment By Nathan On October 18, 2012 @ 9:20 am

The rather large church my wife and I attend in the DC metro area recently surveyed its congregation. One question they asked was if the schedule A deductions were eliminated for charitable contributions how would that affect your giving? Clearly they had this in mind. My wife and I said it wouldn’t. We have an obligation to give to God, the reduction in taxes is irrelevant to that command especially since the money is only ours by the grace of God to anyway.

#6 Comment By RinTX On October 18, 2012 @ 12:40 pm

“Bush 43, who caved in with a medicare expansion, educational programs, and other big government agenda.”

I call BS on this. You make it sound like GWB and the Republicans opposed NCLB and Medicare Part D, but Bush was pressured to sign them by the Dems. That is not true. Republicans could have easily stopped either of these big government programs.

NCLB was passed in May of 2001, during the 107th Congress. At the time, both the House and Senate were controlled by the Republicans. (The Senate majority switched to the Dems when James Jeffords switched from R to I and caucused with the Dems in June of 2001.)

Medicare Part D was passed in 2003, during the 108th Congress. Again, Republicans controlled both houses of Congress.

What recent history has shown us is that a Republican President with a Republican House and Senate means an expansion of the Federal Government.

Modern day Republicans want big government too. They just want THEIR big government.

#7 Comment By dexter On October 18, 2012 @ 2:20 pm

So how exactly will private organizations be able to pick up some of the functions of our much smaller government if we start taxing donations to those organizations? I’m confused.

#8 Comment By cfountain72 On October 18, 2012 @ 2:39 pm

Sorry, but I would MUCH prefer a flat rate, minus a standard deduction per person, vs the mind-numbing labyrinth of government chosen winners and losers deductions that we currently have. Then we can judge our governmental costs primarily by two values: Tax Rates and Standard Deduction Amount. Yes, that means removing the mortgage interest deduction, charitable giving deduction and a list of thousands more. Anything else is just rent-seeking, with the exemptions going to the most well-connected.

Peace be with you.

#9 Comment By Surly On October 20, 2012 @ 9:59 am

The problem with the mortgage interest deduction is that it perversely rewards consumption, not savings or investment. I would like to see the tax code reformed in such a way that rewards conservative behavior at the individual level. Get rid of mortgage deductions. Exempt the first $10,000 in capital gains, interest and dividend income, or else exempt it altogether for people making less than $100K per year. Allow a full deduction for IRA contributions again, regardless of whether the individual has another retirement plan. Allow individuals to deduct (or better yet give them a a credit) to offset the cost of individual health plans.

To pay for all of this, eliminate the deduction for employer-provided health care. Why do we as a nation want to support the linking of your health fate with your job? It really screws up incentives to change jobs, form small businesses, etc. AND it depresses wages. Next, eliminate the mortgage interest deduction. To smooth adjustment, phase it out over a 10 year period (the average person lives in a home seven years–a decade will give them enough time to re-adjust their lives if they were dumb enough to take into consideration tax benefits when deciding how much house to buy).

Get rid of subsidies to agriculture, oil and corporate interests.

Means-test Medicare, so that wealthy seniors pay a premium. Eliminate the income cap on Social Security payroll taxes.

If there is still a deficit, then consider a value added tax–again focus on consumption.

#10 Comment By zic On October 20, 2012 @ 10:57 am

What Surly says; with one exception — the last. Instead of focusing on a VAT on consumption, I’d focus it on pollution.

And notice: there’s not a word in his/her comment about being a conservative, a progressive, a liberal, a Republican, a Democrat, or Libertarian.

#11 Comment By Pat On November 16, 2012 @ 6:39 pm

It might be well to remember, however, that increases in taxes generally don’t go for infrastructure but for ear marks, and Congressional Colas and Pensions.

Congress is not much in a different situation than companies; when you give out funds to faith based organizations for example, as government welfare, or corporate subsidies, someone has to pay for it.

Since those without jobs can’t pay, it leaves only the wealthy to pay.

Trading chips has its drawbacks when the tax system is used more as a revolving door rather than for national welfare. Shuffling works so long before real cuts injure real people.