Sunday, November 18, 2012

The Fiscal Cliff: Finally, a compromise

There may be a solution to the fiscal gridlock pervading the political realm. What is being suggested is placing a cap on tax breaks that many Americans take advantage of every year during tax season. These breaks come in the form of deductions that costs the government an estimated $1 trillion in lost revenue every year.

The benefits to capping these deductions is two-fold. On the one hand, it would prevent careless behavior, discouraging taxpayers from making decisions that would otherwise place them in further debt. We see this happening with the mortgage-interest deduction, which seems to encourage potential homeowners to invest in property they may not otherwise afford.

Then we have the charitable deductions, which provides taxpayers with an incentive to write off a significant portion of donations. Take, for example, the purchase of football season tickets. Public and private colleges have been selling these tickets above face value to raise money for athletic scholarships . Purchasers have been allotted an 80 percent deductible of the donation amount. This type of tax break costs the Treasury over $100 million in yearly missed revenue.

According to data collected by Bloomberg, 34 state universities collected over $467 million in donations during 2010 and 2011.  Nearly $374 million of those donated funds were deductible. At a 28 percent tax rate, it amounted to $105 million in lost revenues during that same tax year.

There is, however, a big obstacle: those darn lobbyists. Although the IRS at one time fought to overthrow season ticket deductibles, special interest groups jumped down its throat until the measurement was reintroduced in 1988. This strategy is expected across the board if certain charities are targeted. The answer then, may be to place a cap on all deductions.

As the Economist explains it:

"Set at $50,000 such a cap would raise some $750 billion over ten years, estimates the Tax Policy Centre [...] more than would be obtained by restoring the top two rates to pre-2001 levels. The cap would barely touch the bottom 60 percent of taxpayers while only slightly hurting the upper-middle class. Most of the money would come from the top one percent."

I say it's worth a shot, mainly because it appears to be a compromise of what dueling politicians are proposing. Revenue is generated without hitting the poor and middle class, and the wealthy won't be expected to swallow a round of tax increases.

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