The Best Idea of the Campaign

No matter which presidential candidate you favor, chances are good that you think the campaign has produced more heat than light.

President Obama has had little to say about his priorities, preferring to focus his arguments on the qualifications, or lack thereof, of challenger Mitt Romney. Last week, after the president’s lack of an agenda of his own became a concern (probably among the voters his campaign is privately polling), campaign officials released a 20-page pamphlet that recycled Obama policies that have gone nowhere during his first term, often for good reason.

Romney’s campaign has mainly been about principles rather than policy specifics – lower taxes, lower spending (except on the military), less regulation. He bootstrapped those principles into a pledge, which is really more of an aspiration, to help the nation generate 12 million new jobs during the next four years. Why will his policies produce 12 million jobs rather than, say, 6 million, or 15 million, or 11,482,963? Romney does not and cannot know. U.S. government policy is only one factor among many that determine job creation, and the president is just one actor, albeit an important one, among many who determine U.S. government policy.

But Romney has embraced a specific proposal that is so logical and compelling that it may stand a good chance of being adopted, regardless of who wins the White House or which parties end up in control of which houses of Congress next year. That proposal, which I think is the single best idea to come out of the campaign, is to limit individual taxpayers’ itemized deductions to some arbitrary amount. The figures $17,000, $25,000 and $50,000 have been bandied about.

The man who has promoted the idea for more than a year is Martin Feldstein, an economist who has served in Republican administrations and one of Romney’s present advisers. It is a way for the government to reduce income tax rates, thereby encouraging individuals to invest more time, effort and capital in wealth-generating endeavors, without costing the government as much revenue as the lower rates alone would imply. In financial parlance, this is about broadening the tax base while reducing tax rates.

Conservatives ought to like the idea, because it would reduce distortions on both sides of the tax equation. Higher rates discourage wealth creation, since taxpayers are sacrificing their time and effort, or risking their capital, partly on behalf of a silent partner, the government. Itemized deductions, by definition, are not related to conducting a trade or business, and generally have little to do with the production of income. They are personal expenses which, for policy reasons of varying merit, the government has chosen to subsidize through the tax code. This encourages certain kinds of spending – such as on bigger homes that require bigger mortgages, whose interest is subsidized – over other kinds of spending, such as the cost of courses that employees might take that might qualify them to enter a new and more lucrative profession.

Liberals ought to like the idea too, because liberals generally think people with higher incomes should pay more taxes and receive fewer tax breaks. The tax breaks provided by itemized deductions skew heavily toward higher-income taxpayers. There is no way to know now whether taxpayers at a certain level will pay more income tax or less, because that depends on exactly which tax rates are established for ordinary income and capital gains, and on where the limit on itemized deductions is set. But, all else being equal, restricting itemized deductions has little or no impact at the bottom of the income scale, and considerable impact at the top.

I like the idea because it is elegant and achievable. There is a decent argument to be made that itemized deductions ought to be eliminated entirely. We should tax income, allow deductions for expenses associated with generating taxable income, and treat personal expenditures as individual choices that the government neither discourages nor subsidizes. But this position has zero chance of being adopted. Every one of our itemized deductions has a constituency behind it. Charities want the deduction to encourage charitable giving. Real estate vendors want the mortgage interest deduction to encourage the sale of more and bigger houses. State and local politicians want the deduction for the income, property and sales taxes they impose because it shifts some of the cost from their constituents to Washington; their constituents want this deduction for the same reason.

The fairest and most achievable option is to set a limit on the available federal tax subsidy and let each taxpayer fill that “bucket,” as it has been called, in whatever way she chooses. I might deduct my mortgage interest. You might not have a mortgage but might deduct your charitable contributions instead. We get treated the same, up to the limit. If we choose to spend our money on these things beyond the limit, it will be a personal choice and a personal expense.

There have been criticisms that Romney’s proposed cap on itemized deductions would not make up for the revenue lost by his planned reductions in the top tax rates. This argument makes about as much sense as complaining that a car engine, standing alone, won’t take you anywhere. You need the rest of the car. In this case, there is no reason to expect the itemized deduction limitation alone to make up for lower tax rates. The gap can be addressed in many other ways, including less federal spending, greater economic growth encouraged by those same lower rates, pro-growth policies in other areas (think of freer trade and increased energy development), and other changes in the tax code.

The fact that the itemized deduction limits would not fully compensate for lower rates is not evidence that the limits would not work, as some critics charge. They will work simply by getting the government to create less economic distortion in personal spending decisions, and by allowing lower rates to help encourage greater growth.

It’s a clean, logical and ultimately non-ideological idea. It doesn’t cast one group of taxpayers as less worthy than others simply because they happen to make more money. It doesn’t make the tax code more complicated. It doesn’t treat taxpayers who happen to live in places with different local tax burdens differently. It makes people responsible for their own choices.

I will be happy when the campaign is over, but this particular proposal is one that I hope will stick around regardless of the outcome.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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