The latest fiscal cliff has led the President and Congress on a manic quest to find new sources of revenue for a federal government that is congenitally unable to live within its means. That extra revenue can come in only two ways. We can raise tax rates, clamp down on tax deductions, or do some combination of the two.
In approaching this issue, the Obama administration has had all of the wrong instincts. It has been adamant in its insistence that all changes on the revenue side increase the level of progressivity. The Tax Reform Act of 2012 thus moves the top marginal rates up to 39.6 percent, without accounting for the Medicare override of 3.8 percent that hits all taxpayers in the maximum tax bracket, making their combined rate 43.5 percent, which is above the Clinton norms. Since taxable deductions are not allowed against the Medicare excise tax, the administration has already taken a first step toward its goal of limiting the deductions that are available to high-income taxpayers.
Its effort to generate new sources of revenue does not stop with the rise in the Medicare tax. On four separate occasions, President Obama has proposed limiting the deduction for charitable contributions to a maximum 28 percent. Ignoring the Medicare tax, that means a $1,000 contribution will generate at most $280 in tax deductions, or a nearly 30 percent reduction in the $396 in deductions allowed under current law.
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