The Tax Policy Center analyzed four approaches to limiting tax preferences, some of which are currently under consideration as part of the fiscal cliff negotiations. Click on an option to read a brief description and to see links to tables showing the effects on the distribution of taxes and effective marginal tax rates.
- Limit the amount of preferential deductions and exclusions to $50,000
- Limit the tax benefit from preferential deductions and exclusions to 2% of AGI
- Limit the tax benefit to 28% of the amount of preferential deductions and exclusions
- Reduce amounts of preferential deductions and exclusions by 20%
TPC's analysis applies each limitation approach to four sets of preferential deductions and exclusions. The four sets include preferential deductions and exclusions that are large, widely used, and generally claimed disproportionately by higher-income taxpayers.
- All itemized deductions
- All itemized deductions other than charitable contributions
- All itemized deductions; tax-exempt bond interest; and employer-sponsored health insurance (ESI)
- All itemized deductions other than charitable contributions; tax-exempt bond interest; and ESI
All estimates are for 2013 under the current policy baseline, which includes extension of the 2001-2010 tax cuts and a patched AMT. Below are short descriptions of the four limitation approaches; they are followed by links to tables showing the distributional effects of each approach and the changes in effective marginal tax rates (EMTRs) on wages and capital gains.
Tables and Descriptions of Limitation Options
Limit Preferences to $50,000 This approach would limit the amount of affected preferences to $50,000 for joint filers, $37,500 for head of household filers, and $25,000 for single filers. To compute taxable income for AMT purposes, the limitation would apply first to itemized deductions disallowed by the AMT.
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| All Itemized Deductions |
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| All Itemized Deductions Other Than Charitable Contributions |
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| All Itemized Deductions; Tax-Exempt Bond Interest; ESI |
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| All Itemized Deductions Other Than Charitable Contributions; Tax-Exempt Bond Interest; ESI |
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| Effective Marginal Tax Rate Tables |
| All Itemized Deductions |
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| All Itemized Deductions Other Than Charitable Contributions |
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| All Itemized Deductions; Tax-Exempt Bond Interest; ESI |
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| All Itemized Deductions Other Than Charitable Contributions; Tax-Exempt Bond Interest; ESI |
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Limit Benefit from Preferences to 2% of AGI Under this approach, which is similar to the
proposal from Martin Feldstein, Daniel Feenberg, and Maya MacGuineas, taxpayers would calculate their tax liability two ways.
- Calculate tax liability under regular rules, including any applicable AMT liability
- Recalculate tax liability (again, by including any applicable AMT liability) after adding the specified preferences back to taxable income and subtracting 2 percent of AGI from the result.
Final tax liability would equal the larger of the two amounts.
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| All Itemized Deductions |
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| All Itemized Deductions Other Than Charitable Contributions |
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| All Itemized Deductions; Tax-Exempt Bond Interest; ESI |
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| All Itemized Deductions Other Than Charitable Contributions; Tax-Exempt Bond Interest; ESI |
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| Effective Marginal Tax Rate Tables |
| All Itemized Deductions |
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| All Itemized Deductions Other Than Charitable Contributions |
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| All Itemized Deductions; Tax-Exempt Bond Interest; ESI |
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| All Itemized Deductions Other Than Charitable Contributions; Tax-Exempt Bond Interest; ESI |
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Limit Benefit of Preferences to 28% This approach would limit the value of the tax benefit from preferences to 28 percent of the preference amount. (This method is similar to the 28 percent limit proposal in the President’s FY 2013 Budget.)
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| All Itemized Deductions |
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| All Itemized Deductions Other Than Charitable Contributions |
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| All Itemized Deductions; Tax-Exempt Bond Interest; ESI |
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| All Itemized Deductions Other Than Charitable Contributions; Tax-Exempt Bond Interest; ESI |
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| Effective Marginal Tax Rate Tables |
| All Itemized Deductions |
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| All Itemized Deductions Other Than Charitable Contributions |
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| All Itemized Deductions; Tax-Exempt Bond Interest; ESI |
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| All Itemized Deductions Other Than Charitable Contributions; Tax-Exempt Bond Interest; ESI |
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Reduce Amount of Preferences by 20% This approach would reduce preference amounts by 20 percent for both regular tax and AMT purposes. Preference options that include tax-exempt interest and employer-sponsored health insurance would increase gross income by 20 percent of the amount of those exclusions.
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| All Itemized Deductions |
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| All Itemized Deductions Other Than Charitable Contributions |
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| All Itemized Deductions; Tax-Exempt Bond Interest; ESI |
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| All Itemized Deductions Other Than Charitable Contributions; Tax-Exempt Bond Interest; ESI |
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