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hfojvt's Journal
Posted by hfojvt in General Discussion
Mon Apr 18th 2011, 01:29 PM
I already suggested this in November 2006

http://journals.democraticunderground.com/...

and I still think it is a good idea. The Catfood Commission and Obama both endorsed the idea of phasing out some itemized deductions at higher income levels. While I support that, it seems to just add to the complexity of Federal taxes when it should be a goal to simplify them.

Getting rid of Schedule A does that. It eliminates a form, and 14 pages of instructions and complicated rules and record-keeping requirements.

Further, I now have IRS stats, showing who gets the itemized deductions and how much they get. First, I eliminate tax filers with income below $10,000 since I figure most of them are high-schoolers or retirees, since nobody can really live on less than $10,000 a year (which is a funny thing for me to say since I lived on less than $10,000 for about five years of my post college life.)

Start with the lower income tax filers, who make between $10,000 and $40,000. This group makes up 48% of all tax filers, but only 16% of them itemize their deductions and they make up 10.9% of the total value of itemized deductions (the total value is an astounding $1.3 trillion).

As a side note, about the strangeness of IRS statistics. They show that, of filers with AGI less than $15,000 that 7.7% of them itemized deductions and the average was $15,782. Tell me how somebody with less than $15,000 in income ends up with almost $16,000 in itemized deductions. The answer must be that they have non-taxable income or large savings accounts to tap into.

The next group are those with AGI between $40,000 and $60,000. They make up 17% of all taxpayers and only 41.5% of them itemize their deductions, and they get 11.2% of the total. Those two groups together are 65% of all adult taxpayers, only 22.8% itemize their deductions, and they only get 22% of the total.

First, this means that 77% of this group will not be affected by the loss of Schedule A because they already do not itemize. That is 50% of adult taxpayers. However, I have no desire to substantially increase the taxes of people making less than $60,000 a year which the loss of schedule A would do to the 23% who itemize. To prevent that, I would also propose 3 other changes. First, a deduction for 'catastrophic medical expenses'. These would be medical expenses more than 25% of AGI, and could be covered by another line on the 1040. Second, increase the standard deduction by $1,000 per person and bring back the making work pay credit of $400.

The average amount of itemize deductions for people with income less than $60,000 is $18,757. The standard deduction for a couple is now $11,400, and I would bump that to $13,400. Leaving only $5357 taxed at 15% would be $804, which is about equal to the $800 making work pay credit.

So people making less than $60,000 would mostly be breaking even. Then there's the other side. 321,294 filers make over $1,000,000, and almost 97% of them itemize their deductions. They are .28% of all adult taxpayers, but they get almost 11% of the total deductions. Since they pay at the highest rates, their deductions are also worth more. They get $141.6 billion in deductions whereas their standard deductions would be no more than $4 billion. Their itemized deductions are thus worth about $45 billion or about $141,000 per household.

The next richest group also does very well with itemized deductions. Those with incomes between $100,000 and $1,000,000. There are only 17.9 million of them which is only 15.4% of adult taxpayers, but they get 44.4% of the benefits as 88% of them itemize. They get $579 billion in itemized deductions versus the $204 billion they'd get from standard deductions. (and the $240 billion they'd get from the proposed higher deduction). That's about $118 billion a year in tax breaks going to a group that is in the top 20%.

Schedule A, itemized deductions, is a set of loopholes that mostly benefit those who are already better off. It's not worth it to give a mere $13.6 billion in tax cuts to the bottom 65% while giving $150 billion to those in the top 20%.

Ironically enough, my brother was complaining about this very proposal, which he said was being considered according to an article he read - and my brother itemizes deductions. However, I wonder if his deductions are worth more than the extra $2,800 I am proposing, and he also gets $2,000 in tax breaks for his kids, that our parents did not get. Getting rid of Schedule A would not cost him that much, it would simplify things for filers and for the IRS and would probably reduce the number of people paying the Alternative Minimum Tax.
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