WSJ: Romney’s Tax Deduction Cap Makes Sense Economically and Politically

WSJ: Romney’s Tax Deduction Cap Makes Sense Economically and Politically

The Obama campaign and the press corps keep demanding that Mitt Romney specify which tax deductions he’d eliminate, but the Republican has already proposed more tax-reform specificity than any candidate in memory. To wit, he’s proposed a dollar limit on deductions for each tax filer.

[T]he tax cap is a big idea, and potentially a very good one. The proposal makes economic sense to the extent that it helps to pay for lower marginal tax rates. Lower rates with fewer deductions improve the incentive for investing and taking risks based on the best return on capital rather than favoring one kind of investment (say, housing) over another. This would help economic growth.

The idea may be even better politically. The historic challenge for tax reformers is defeating the most powerful lobbies in Washington that exist to preserve their special tax privileges. Among the biggest is the housing lobby that exists to preserve the mortgage-interest deduction—the Realtors, home builders, mortgage brokers and the whole Fannie Mae gang.

But don’t forget the life insurance lobby (which benefits from the tax exclusion on the equity buildup in policies), the tax-free municipal bond interest lobby, the charitable deduction lobby and more. Each one will fight to the death to preserve its carve-out, which means that reformers have to engage in political trench warfare to succeed.

This is one reason President Obama wants Mr. Romney to be more specific: The minute he proposed to limit the mortgage-interest deduction, the housing lobby would do the Obama campaign’s bidding by running ads against Mr. Romney’s plan. Mr. Romney is right not to fall for this sucker play.

By limiting the amount of deductions that any individual tax filer can take, Mr. Romney is avoiding this lobby-by-lobby warfare. He’d let individual taxpayers decide which deductions they want to take up to the limit. In effect, the deductions would compete with one another as taxpayers decided which one was most important to them.

We realize the tax cap isn’t perfect and carries some risks. … The larger point is that Mr. Romney is serious about reform and has put on the table a serious idea for how to finance and achieve it. That’s far more than Mr. Obama has proposed about anything in a second term.

I am grateful for the above article. I had never read any decent analysis of Romney’s tax plans before this. I can now see where such a plan would make sense economically. I especially see where it make sense politically. It avoids the trap of having to go to war with entrenched interests when talking about tax reform.