It’s Fix The Tax Code Friday!
How simple do you want your tax return to be? Taxpayers claim they want simple all of the time. Some love the idea touted by House Ways and Means Committee Chair Kevin Brady (R-TX) of making taxes so simple they could be filed on a postcard. Still others find President Trump’s plan to make the Tax Code so simple it would “put H&R Block out of business” appealing.
The problem with many of the plans to simplify taxes, of course, is that cutting through the Tax Code can also mean cutting tax breaks. And while taxpayers may like this idea in theory, it doesn’t always translate into support. In 2015, then-presidential hopeful (now Secretary of the Department of Housing and Urban Development) Dr. Ben Carson found this out the hard way when proposed completely eliminating tax deductions, including the charitable deduction. To offset the loss, he proposed a tax rate reduction.
It wasn’t a new suggestion. For years, Congress has recognized that the easiest way to scale back the Tax Code is to just start cutting. But where? And how much? As film director Martin Scorsese has said, “There’s no such thing as simple. Simple is hard.”
As Congress debates tax reform, the idea of limiting or eliminating certain tax deductions has been tossed around yet again. Two popular deductions, the home mortgage interest deduction and the charitable donation deduction, are considered so sacred that they are rarely touched. However, a Republican proposal to cap deductions would affect those deductions – just not directly. Politically, that’s a lot more palatable. But is it smart fiscal policy?
The Tax Foundation reported that the deduction for charitable contributions cost the federal government $58 billion in lost revenue in 2016. The Foundation also reported that “eliminating the charitable deduction would decrease the size of the economy by 0.09 percent due to the resulting higher tax burden.” The upside? “[T]he economy would grow by 0.79 percent if the revenues from eliminating the charitable deduction were used to cut the income tax rate.”
Statistically, about one in three taxpayers currently itemize their deductions on a Schedule A. That number is expected to drop to about one in six taxpayers under the tax reform proposal put forth by the Republicans in Congress. A decrease in the numbers of taxpayers who are in a position to itemize deductions could impact incentives to donate to charity, the same end result, some argue, as eliminating the charitable deduction altogether.
That, of course, brings us to today’s Fix The Tax Code Friday question:
Should we limit or eliminate the charitable deduction?
