Capping Individual Tax Expenditure Benefits

13 Pages Posted: 11 Apr 2011 Last revised: 13 Apr 2011

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Daniel R. Feenberg

National Bureau of Economic Research (NBER)

Maya MacGuineas

affiliation not provided to SSRN

Date Written: April 2011

Abstract

This paper analyzes a new way of reducing the major individual tax expenditures: capping the total amount that tax expenditures as a whole can reduce each individual's tax burden. More specifically, we examine the effect of limiting the total value of the tax reduction resulting from tax expenditures to two percent of the individual's adjusted gross income. Each individual can benefit from the full range of tax expenditures but can receive tax reduction only up to 2 percent of his AGI.Simulations using the NBER TAXSIM model project that a 2 percent cap would raise $278 billion in 2011. The paper analyzes the revenue increases by AGI class. The 2 percent cap would also cause substantial simplification by inducing more than 35 million taxpayers to shift from itemizing their deductions to using the standard deduction. For any taxpayer for whom the 2 percent cap is binding, a cap would reduce the volume of wasteful spending and the associated deadweight loss. Even for those taxpayers for whom the cap is not binding but who are induced by the cap to shift from itemizing to using the standard deduction, the deadweight loss associated with deductible expenditures would be completely eliminated

Suggested Citation

Feldstein, Martin S. and Feenberg, Daniel R. and MacGuineas, Maya, Capping Individual Tax Expenditure Benefits (April 2011). NBER Working Paper No. w16921, Available at SSRN: https://ssrn.com/abstract=1805426

Martin S. Feldstein (Contact Author)

National Bureau of Economic Research (NBER) (deceased)

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Harvard University (deceased)

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Daniel R. Feenberg

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-588-0343 (Phone)

Maya MacGuineas

affiliation not provided to SSRN ( email )

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