More on the Deduction Fairy

By James Kwak

[Updated with Mnuchin’s position on charitable contribution deduction.]

I wrote two days ago about the fairy tale that you can lower tax rates for the very rich yet avoid lowering their actual taxes by eliminating those mythical beasts, loopholes and deductions. The basic problem with this story is that, at the very high end of the distribution, deductions and exclusions (with the possible exception of the deduction for charitable contributions) just don’t amount to very much as a percentage of income. Therefore, eliminating those deductions may increase rich people’s taxes by tens of thousands of dollars, but that is only a tiny proportion of their overall tax burden, and not enough to offset any significant rate decrease.

Unlike me, Daniel Hemel and Kyle Rozema are actual tax scholars (Hemel has a blog on Medium), and their detailed research largely tells the same story. They have a forthcoming paper that analyzes the mortgage interest deduction (MID) and shows that, while it is worth more dollars to rich people than poor people (for all the well-known reasons—bigger houses, higher marginal rates, itemizing), the MID causes people in the top 1% to pay a larger share of the overall tax burden. Therefore, eliminating the MID and using the increased tax revenue to reduce tax rates for everyone (what Mnuchin proposed in concept) would be a large windfall for the top 0.1% and a small windfall for the rest of the 1%.

The numbers are in the last column of this table:

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The Proportionate column shows the distributional effects of repealing the MID and using the money to reduce everyone’s taxes in equal proportion, which are even worse. (The only good outcome is the Per Household column, which uses the revenue from eliminating the MID to give every household a flat $558 tax rebate, but no one is talking about that.)

Hemel and Rozema do a similar analysis of the deduction for state and local taxes, which I didn’t mention in my post (and which many rich families can’t take because of the AMT). The basic story is the same: repealing the deduction to lower rates is, again, a windfall for very rich families.

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The only deduction that turns out to increase inequality under this approach is the one for charitable contributions, because there is no practical limit to the possible size of such donations. (And guess what? Mnuchin doesn’t want to touch this one!) Eliminating this deduction could cause the rich to pay more in taxes, but they could easily maintain the same level of disposable income simply by donating less to charity. In other words, tax revenues would go up, but the money would effectively be coming from charities, not from rich people.

So, there is no deduction fairy. You can’t cut tax rates in anything like the way the Trump administration proposes without vastly increasing inequality. Once again, it’s a conceptually plausible idea that is providing air cover for a massive raid on government services to benefit the very rich.

13 responses to “More on the Deduction Fairy

  1. …Except that the way the rich use the charitable deduction is an enormous scam that is often just a tax break and only rarely “charitable” (e.g. “donating” your personal art collection to your personal non-profit in-home private museum). You should strongly support its repeal.

  2. If God wanted too torture parents, just have him give them a retarded child.

  3. Matthew Turner

    Great piece. But here ‘yet avoid raising their actual taxes’ you mean ‘lowering’, yes?

  4. I have been handed over – generation after generation – the the IRS employees responsible for stealing everything the LEGAL “immigrants” from WWII has to call their own through HONEST LABOR.

    Personally, I let new high quality non-criminally insane religiously zealous “greed is good” believer immigrants

    the scoop about building family wealth in USA, which. supposedly, could not be done in your “old country”…..

    Stuff like that I am paying taxes on a 5K PERSONAL retirement fund withdrawal I made the year I had income less than 10K because I am on a special IRS list that has written laws specifically to wipe out the “producer” class of immigrants – “economically”.

    Still wanna come here? Why can’t perfected, atheistic and autistic, exported via bloodshed on the butt of democracy “capitalism” do the same for you in your old country that it can do for you in USA? If not, why not? Something in the “culture”…?

    Putting aside all the “you deserve to die for doing this” IMAGININGS we all are having toward each other, here’s the VALID question. Your elite status is self proclaimed. And, mercifully, it has been established that your “economy” is the product of mental illness.

    So how will you accept the request to step aside from having access to the levers of FIAT ISSUED CURRENCY?

  5. And just think Annie, we are only in the middle innings of this failed experiment called, the human race. I say with another 4.5 billion years they might at least get started on the financing, until then, it’s all just a formulatic failure of epic proportions with a side of greed, hypocrisy, and arrogance.

  6. And that is how “accountability” among the psycho class keeps getting deflected – point to some made up bs like “…..failed experiment called the human race”….

    Noooo-ooo-ooo. If you FIRE everyone planted in the IRS since The Patriot Act and put in people to go after the back taxes of everyone with 10 million in “dark pool derivatives” instead of people with UNDER 10K, you would get a lot of fcking $$$$ for the middle east psychodrama algorithm loop that feeds the bank accounts of the Merchants of Death – you do not need to “change the tax code” ….

  7. Juggle the #’s any way you want, they all end up at the same place. Which is, everything goes to hell in a hand basket, unless YOU, prop it up.

  8. Hold the nose…..skunk let loose….

    UNDER 10 K – LAW IS YOU DO NOT PAY TAXES.

    LAW IGNORED BY A MORMON B_TCH AT IRS OFFICE IN SALT LAKE CITY BECAUSE THE COMMAND TO IRS PEONS IS TO GO AFTER PEOPLE WITH IRAs THAT HAD TO ACCESS THEM EARLY BECAUSE OF “GLOBAL BANKING CRISIS”.

    TRUTH IS IT WAS ALL SET UP TO DO JUST WHAT IT DID _ WIPE OUT THE EQUITY OF PRODUCERS WHEN THEY HIT THEIR 50s.

    NEW MIDDLE CLASS ARE HEROIN DEALORS AND POT GROWERS THANKS TO ALL THE PEDOPHILES WHO RUINED THE KIDS IN SECRET – THE BETTER THAN AVERAGE KIDS IN SPORTS, SCHOOLS AND CHURCHES. ENTER OBAMACARE TO ORGANIZE THE FLOW OF $$$$ FOR THEM.

    A GOVERNMENT MORE DISLOYAL TO THE CITIZENS THAN THIS PATRIOT ACT NIGHTMARE HAS NEVER DARKENED THE EARTH BEFORE NOW.

    THE SHAMANS OF GIZMOLOGY PROPPING UP THE MENTAL ILLNESS OF ECONOMANAISM ARE ALREADY DEAD AS RECORDED ON THE “ETERNAL NOW” DATELINE. JUST A FART IN THE WINDS OF TIME….

  9. Have another chocolate bar at someone else’s expense Annie, the laws of nature (human law being defective and all), and real education can prevent human ills, even Mormon ones, if only silly humans would listen, but they wont, ergo the inevitable doomed human scenario.
    It was written, Urantia and all, time, and beans and wind and energy and things.
    So we had to destroy the human race in order to save it, no big dealeo, I say!

  10. I do not know who you are in REAL life, Skunk, but your constant mantra of “destroying human race to save it” is pure self-hatred projected onto the entire human race, You are iniquitous and every single human being in the human race you want to destroy has the inalienable right to protect themselves from you and your ilk. Whatever it takes. And judging from your constant free will choice to murder and steal to prove your point, there might only be one option in getting rid of you and your incurable mental rabies.

  11. Well when the guy(a God you dont believe in) shows up to prove that everything you and yours have done your whole life time was completely useless and adds up to nothing, and you are not ready to meet his demands, DONT BLAME ME! Time waits for no one.

  12. Annie: could you rewrite your comments using full sentences and enough grammar for those of us who can’t figure out what exactly you’re saying? Is English not your first language?