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Capping Individual Tax Expenditure Benefits

Author

Listed:
  • 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

Suggested Citation

  • Martin Feldstein & Daniel Feenberg & Maya MacGuineas, 2011. "Capping Individual Tax Expenditure Benefits," NBER Working Papers 16921, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16921
    Note: PE
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    File URL: http://www.nber.org/papers/w16921.pdf
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    Cited by:

    1. Feldstein, Martin, 2016. "Reducing long term deficits," Journal of Policy Modeling, Elsevier, vol. 38(4), pages 632-638.
    2. Leonard E. Burman, 2013. "Pathways to Tax Reform Revisited," Public Finance Review, , vol. 41(6), pages 755-790, November.
    3. Jeffrey B. Liebman, 2013. "The Deterioration in the US Fiscal Outlook, 2001-2010," Tax Policy and the Economy, University of Chicago Press, vol. 27(1), pages 1-18.
    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. Leonard Burman, 2013. "Pathways to Tax Reform Revisted," Center for Policy Research Working Papers 155, Center for Policy Research, Maxwell School, Syracuse University.
    6. Martin Feldstein, 2016. "Dealing with Long-Term Deficits," American Economic Review, American Economic Association, vol. 106(5), pages 35-38, May.
    7. Martin Feldstein, 2017. "The tax reform agenda," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 52(4), pages 208-215, October.
    8. Andrew A. Samwick, 2013. "Donating the Voucher: An Alternative Tax Treatment of Private School Enrollment," Tax Policy and the Economy, University of Chicago Press, vol. 27(1), pages 125-160.
    9. Cordes, Joseph J., 2011. "Re-Thinking the Deduction for Charitable Contributions: Evaluating the Effects of Deficit-Reduction Proposals," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(4), pages 1001-1024, December.
    10. 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.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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