Harvard's Martin Feldstein: Cut Tax Deductions and Credits to Curb Budget Deficit

Thursday, 21 Feb 2013 11:40 AM

By Dan Weil

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Harvard economist Martin Feldstein recommends shrinking tax deductions and credits – “tax expenditures” – to make a dent in the $1.1 trillion budget deficit.

“Putting a cap on tax expenditures — those features of the tax code that are a substitute for direct government spending — can break the current fiscal impasse and prevent the dangerous explosion of the national debt,” he writes in The Wall Street Journal.

“If a cap is combined with entitlement reforms, the government will also be able to reduce tax rates and increase some spending to accelerate the economic recovery.”

Editor's Note:
Use This Single Loophole to Pay Zero Taxes in 2013

The tax reform would bridge Democrats’ desire for higher taxes and Republicans’ desire for lower spending, as the deductions and credits amount to a government subsidy, Feldstein says.

“Limiting the tax savings from all deductions and the two major tax exclusions to 2 percent of an individual's adjusted gross income would reduce the deficit in 2013 by $220 billion,” he writes.

That 2 percent refers to tax savings, not the amount of the deductions and exclusions, Feldstein explains. “This means that for someone taxed at a 25 percent marginal tax rate, the 2 percent cap would limit deductions and exclusions to 8 percent of that individual's adjusted gross income.”

A cap on expenditures would be acceptable politically, as all tax expenditures are treated equally, he notes.

“The combination of a cap on tax expenditures and a reform of entitlement programs would stabilize federal finances over the next decade,” he adds.

“Once this is achieved, Republicans and Democrats should also be able to agree on some short-term increases in government spending to improve the nation's infrastructure and stimulate a more rapid economic recovery. But structural reductions in future deficits are the crucial context for any increase in near-term government spending.”

Meanwhile, the Committee for Economic Development (CED), a non-partisan, business-led public policy organization recommends that Congress do away with the sequester (automatic spending cuts) and replace it with a combination of spending cuts and tax increases.

“The sequester is an insufficient tool by which to attempt to address our nation’s greatest issues: a growing deficit and debt and the need for fiscal reform,” Roger Ferguson, CEO of TIAA-CREF and co-chairman of CED, said in a statement.

Editor's Note: Use This Single Loophole to Pay Zero Taxes in 2013

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