Sucker Bait: Tax Rate Cuts for Lost Deductions

Published November 27, 2012

Mitt Romney’s campaign musings about how he would cut income tax rates by 20 percent (when half of Americans don’t even pay federal income taxes) has now floated the ultimate loser for all taxpaying Americans.

This is a $17,000 limit per person for all deductions including mortgage interest, charitable, and state taxes. The concept was first floated by President Obama to limit charitable deductions to a maximum rate of 28 percent for high-income taxpayers, even though marginal tax rates are at 35 percent and may go to 39 percent at the end of this year. Once the principle is established to curtail deductions, future congresses can then cut them more and more.

This was the Left’s attempt to get the camel’s nose under the tent, that is to start curtailing deductions, especially for large charitable and educational foundations. They have quickly jumped to note “bi-partisan” support for their agenda. “Romney is now admitting that middle-class tax increases on housing, health care and charitable deductions are on the table,” said Adam Fetcher, a spokesman for Obama.

Safer Than Rate Cuts

Tax deductions (denounced by the Left as “loopholes”) are infinitely safer and more lasting than any cuts in tax rates that can easily be raised for the next war or crisis by any new Congress. Deductions, the large ones left, are for home mortgage interest, state income taxes, and charitable deductions. They are supported by all sorts of interests. These include employees of non-profits, homeowners, residents of high income tax states such as New York and California, charities, real estate brokers and a host of other Americans. Raising tax rates on the wealthy (over $200,000 income) is only opposed by a minority of Americans who actually pay these taxes.

Examples of higher rates after losses of deductions are legion. Former Presidents Bush 41 and Clinton raised rates after President Reagan cut out deductions supposedly in return for lower rates. Bruce Bartlett details the recent history in his book, The Benefit and the Burden. He writes how Reagan reduced the top rate to 50 percent and then, with the Tax Reform Act of 1986, took away many tax preferences in return for reducing the rate to 28 percent.

Subsequently George H.W. Bush raised it to 31 percent and Clinton then raised it to 39 percent, but none of the tax preferences were reinstated. With the next financial crisis they could easily be put back to 50 percent. Although most of the agenda for higher taxes comes from the Left, a contingent of Republicans also support higher taxes if the money goes for more “defense.”

As an aside to the above, Bartlett explains a forgotten feature of Clinton’s tax increase to 39 percent during the prosperous 1990’s. Obama’s proposal to copy it is widely praised now as showing that higher taxes don’t affect economic growth. Clinton increased the threshold at which the highest rates kicked in from $80,000 to $250,000 of yearly income. In effect this meant there was no increase for most taxpayers.

Threat to Non-Profits

There is another major tax attack coming on non-profits — that is, charitable and educational foundations and their think tanks. These vast sources of wealth are looked upon more and more hungrily by Washington’s taxers. A good analogy is during medieval times when Europe’s kings desperately needed more money for their wars. They looked and saw church lands and monasteries as a vast source of untaxed wealth. It took them a while but soon they had seized such lands in most of Europe. The formerly wealthy Catholic Church never recovered its former power.

Although most Americans would think of charity, medical research, theaters and schools as primary beneficiaries of tax-deductible donations, political education is the area most vital to maintaining our freedoms from the warfare-welfare state. Think of the Cato Institute, the ACLU, the Federalist Society, the Bill of Rights Institute, the Heritage Foundation, Brookings, the Hoover Institution and the new state think tanks.

Tax-deductible donations and bequests at death to these non-profits and hundreds of others like them allow independent sources of wealth able to challenge and (sometimes) limit government abuse and power. They don’t exist in most foreign nations precisely because governments don’t like them, so there is no tax deduction for supporting them. They are much of the reason we have preserved most liberties in America.

If Romney had won election and then become unpopular during the difficult times ahead, it’s quite possible he’d have had a Democratic congress in 2014. Then we’d have had the most toxic tax alliance, as history has proven time and again: a weak Republican president without strong anti-tax convictions and a Democratic congress pushing him to approve their agenda. Think about how this already happened with former presidents Nixon, Bush 41, and Gerald Ford, or Bush 43, who caved in with a Medicare expansion, educational programs, and other big-government agenda.

Jon Basil Utley ([email protected]) is associate publisher of The American Conservative. Used with permission of The American Conservative.