Bloomberg News reporters Richard Rubin and Heidi Przybyla obtained a Joint Committee on Taxation letter today that looks at a number of tax reform options. The headline news is that, under a set of assumptions used by the committee, eliminating all itemized deductions would finance only a 4 percent across-the-board reduction in tax rates.
This letter provides some useful guidance on how trade-offs might be made in future tax reform discussions. But be careful how you interpret it.
I'm seeing a lot of people on Twitter suggest, incorrectly, that this is another data point undermining Mitt Romney's tax plan. There are a lot of such data points, but this isn't one of them. The committee only achieves so little rate reduction because it starts from an unintuitive tax baseline and does not consider the full spectrum of tax expenditures available for elimination.
First, it's important to note that the JCT uses a baseline that does not include a "patch" of the Alternative Minimum Tax. Congress routinely passes temporary laws that sharply raise the exemption from the AMT, without which literally tens of millions of Americans would be drawn into the tax.
The committee's letter assumes the AMT patch would be paid for with proceeds from the elimination of itemized deductions, eating up hundreds of billions of dollars that therefore can't go to rate reduction. But Congress, in practice, does not offset the AMT patch, and tax reform plans (including Romney's) typically start from the position that the AMT patch does not need to be offset.
The analysis also looks only at itemized deductions, the tax preference for capital gains, and the tax preference for municipal bonds. It does not touch the tax exclusion for employer-paid health insurance, which all by itself is almost as costly as all itemized deductions.
There are also a number of other buckets of tax preferences available for reduction that JCT does not address, generally items that get excluded from gross income rather than deducted from it. If these were included, a lot more revenue would be available for base-broadening, and rates could be cut further without increasing the deficit.
The problem with Romney's plan isn't that there aren't enough tax preferences out there to finance a 20 percent cut in tax rates; there are. The problem is that tapping into enough of them requires shifting the tax distribution downward so that the middle class pays more and the wealthy pay less.
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