Toomey Plan Would Reduce Itemized Deductions by 75-Percent

Toomey Plan Would Reduce Itemized Deductions by 75-Percent

News story posted in Congressional Correspondence on 14 November 2011| comments
audience: National Publication | last updated: 14 November 2011


According to a November 9 Democratic analysis, a proposal submitted by "Super Committee" member Sen. Patrick J. Toomey, R-Pa., would reduce itemized deductions, including the charitable deduction by 75-percent, and would cut personal exemptions, above-the-line deductions, and personal credits.

Full Text:

Date: November 9, 2011


Re: Senator Toomey's Tax Proposal

Senator Toomey's tax proposal to the Super Committee would make permanent the Bush tax rates, and then radically scale back and/or eliminate tax expenditures for individuals in order to raise enough revenue to simultaneously (a) pay for cutting the rates very significantly, and (b) purportedly leave some revenue for deficit reduction. The Toomey proposal would reduce all current marginal individual income tax rates by a certain percentage in order to get the top individual income tax rate to 28 percent. Many aspects of the Toomey proposal are unspecified. However, it is clear that under any formulation, his proposal would lower the average tax rate on high-income taxpayers significantly below the level of the Bush tax cuts, while raising the average tax rate significantly for low- and middle-income households above the level of the Bush tax cuts. It would result in massive tax cuts relative to current law because it makes the Bush tax cuts permanent. It would require eliminating virtually all deductions for the middle class. Ultimately, it would also bring us even farther away from balancing the budget.

The following table shows the individual income tax rates under current law for 2011/12, and for 2013 and beyond when the Bush tax cuts expire. Senator Toomey proposes to lower all the 2011/12 rates by roughly 19.5%, cutting the top rate to 28%. The third column indicates the new rate structure he is proposing. This new rate structure would result in a much larger increase in after-tax income for high-income households relative to current policy.

                            2013 and          Rates under
          2011/12 Tax       Beyond Tax        Toomey
          Rates             Rates             Proposal

             35                39.6              28
             33                36                27
             28                31                23
             25                28                20
             15                                  12
             10                                   8

Lowering the rates by this much would cost about $3.2 trillion over 10 years relative to "current policy,"1 (and $6.9 trillion relative to current law). Senator Toomey proposes cutting taxes by $291 billion less than current policy. This means that Senator Toomey's proposal must raise about $3.5 trillion over 10 years in order to pay for these tax cuts and raise about $300 billion relative to current policy.

The Toomey proposal either doesn't provide any specifics about which tax expenditures he proposes to cut in order to raise $3.5 trillion -- or the proposal simply doesn't contain them. However, a similar proposal was recently scored by JCT that is almost as dramatic. It would make current policy permanent and then broaden the base sufficiently to pay for cutting all tax rates by roughly 15% from the 2011/12 rates (the top rate would be cut to 30%), with $600 billion left over. This proposal would cost almost as much -- $3.0 trillion over ten years.

This similar proposal gives a sense of how dramatically Toomey's proposal would have to cut deductions for the middle class. In order to raise $3.0 trillion, it would:

1. Reduce the personal and dependent exemptions ($3,800 per taxpayer and for each dependent) by 75%.

2. Reduce all itemized deductions, including the deductions for home mortgage interest, charitable contributions, and state and local taxes, by 75%.

3. Reduce certain above-the-line deductions by 75%.

4. Reduce all personal credits except the EITC, including the child tax credit, college tuition credits, and credits for retirement savings, by 75%.

Meeting Senator Toomey's requirement of a top rate of 28% would require even more dramatic cuts to tax expenditures than those listed above. He has indicated that he is not open to raising taxes on capital income, including deductions for retirement savings and the reduced rates on capital gains and dividends, which generally benefit high-income taxpayers. This means that the only way to make the numbers add up is essentially to eliminate all of the deductions and credits listed above immediately with no transition, or to enact the tax expenditure cuts above and dramatically curtail the exclusion for employer-provided health insurance.

Preliminary data from the Joint Committee on Taxation (JCT) for this similar proposal shows that, relative to current policy with the Bush tax cuts in place, it would be a significant tax cut for those with income above $200,000 -- and especially for millionaires. For example, a taxpayer who earns $5 million a year would see a tax cut of about $340,000 due to the rate cuts. At the same time, the dramatic tax expenditure cuts would have relatively little effect on them. Almost all of the tax expenditures affected are worth very little to someone earning $5 million as a share of their income because the amount that can be deducted is capped.

The following table summarizes the JCT preliminary estimates of the average change in tax liability in 2013 for individuals in various income groups under this similar proposal.


                                    Average Change in Tax
 Income Class                       (Relative to Current Policy)

          0 <    $10,000                         $137
    $10,000 <    $20,000                         $305
    $20,000 <    $30,000                         $671
    $30,000 <    $40,000                         $793
    $40,000 <    $50,000                         $796
    $50,000 <   $750,000                         $930
    $75,000 <   $100,000                         $987
   $100,000 <   $200,000                       $1,297
   $200,000 <   $500,000                      -$1,957
   $500,000 < $1,000,000                     -$13,301
 $1,000,000 +                                -$31,764
 TOTALS                                          $582

The fact that Senator Toomey has taken the preferential rates for capital gains and dividends off the table means that there is no way to significantly reduce this regressivity and raise the amount of money he wants to raise. The only tax expenditures that significantly benefit multimillionaires are the reduced rates on capital gains and dividends and the deduction for state and local taxes. Even in very high tax states, the state and local tax deduction only reduces the average tax rate of a multimillionaire by 3 percentage points. Senator Toomey is proposing cutting the tax rate on multimillionaire's earned income by 7 percentage points relative to the Bush tax cuts, and almost 12 percentage points relative to current law.

Further, rough extrapolations taken from JCT's preliminary estimates suggest that this proposal similar to Senator Toomey's would significantly reduce the after-tax income for all taxpayers with income less than $200,000 relative to current policy. As the following table shows,someone earning between $30,000 and $40,000 would see their after-tax income fall by almost 2%. At the same time, for the after-tax income for all taxpayers with income over $200,000 would increase. The increase in after-tax income for taxpayers with income between $500,000 and $1 million would be 2.5%.


                                 % Delta in After-Tax Income from
 Income Class                    Current Policy to Similar Proposal

          0 <    $10,000                       -0.5%
    $10,000 <    $20,000                       -1.4%
    $20,000 <    $30,000                       -1.7%
    $30,000 <    $40,000                       -1.9%
    $40,000 <    $50,000                       -1.7%
    $50,000 <   $750,000                       -1.5%
    $75,000 <   $100,000                       -1.4%
   $100,000 <   $200,000                       -1.2%
   $200,000 <   $500,000                        0.9%
   $500,000 < $1,000,000                        2.5%
 $1,000,000 +                                   0.9%

The data demonstrate that our tax system would become dramatically less progressive under the tax system envisioned by Senator Toomey than it would be even if all the Bush tax cuts were made permanent. It would be a windfall for millionaires, and a large tax increase for struggling working families. This is his idea of how to balance out dramatic spending cuts to Medicare, Medicaid and the safety net.


1 This baseline would permanently extend the Bush tax cuts, 2012 estate tax, an AMT patch, the R&D credit and higher section 179 expensing.


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