11/13/2012 10:36 am ET

Senate Democrats Consider Capping Tax Deductions, A Romney Proposal

Once upon a time, Democrats totally hated Mitt Romney's tax plan.

That's so last week. Now, many Senate Democrats are supporting one idea Romney floated that would enable Congress to raise taxes without technically raising tax rates: capping some itemized deductions.

The New York Times reports that a cap on deductions was floated as part of the grand bargain to avoid the "fiscal cliff." If Congressional Republicans and Democrats do not reach an agreement on cutting the deficit, a set of $1.2 trillion in tax hikes and spending cuts will go into effect on Jan. 1, potentially hurling the U.S. into recession.

"There's a renewed interest," Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, told the NYT, referring to capping deductions.

Romney proposed capping itemized deductions at $25,000 per household in October, in order to help pay for a 20 percent cut in marginal tax rates. A $25,000 cap on itemized deductions would fall mostly on the richest fifth of American households, according to the Tax Policy Center. Obama also has proposed capping itemized deductions for the wealthy, but his proposal stalled in Congress. Economists such as Harvard economics professor Martin Feldstein support capping deductions.

Some argue that tax deductions are actually a stealthy way for politicians to legislate government spending without labeling it that way. In other words, the government spends money to encourage people to buy houses and donate to charity, among other things, though these aren't technically government expenditures.

Capping deductions could be more politically feasible than totally eliminating popular tax breaks, such as the mortgage interest deduction. It also could be more feasible than raising marginal tax rates, which Congressional Republicans oppose.

Obama recently has proposed cutting $3 in spending for every $1 in new tax revenue raised to reduce the deficit by $4 trillion over 10 years, which would disproportionately hurt the poor, the middle class, and the elderly. Congressional Republicans, meanwhile, have been reluctant to let any taxes rise.



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