Romney floats tax deductions cap idea resembling one from Obama

* Republican challenger broaches possible $17,000 limit

* Obama has made similar proposal ahead of 'fiscal cliff'

* Cap idea has compelling political logic-AEI's Viard

By Kevin Drawbaugh

Oct 3 (Reuters) - Mitt Romney's talk of putting a cap on income tax deductions aligns him with others, including President Barack Obama, behind a tax code change that could gain traction in Washington.

On Tuesday, the eve of his first debate with Obama, the Republican presidential challenger told Fox News TV in Denver that one option for changing the code could be to cap deductions, perhaps at $17,000 for a middle class family.

"You could use your charitable deduction or your home mortgage deduction, or others. Your healthcare deduction. And you can fill that ... $17,000 bucket that way," he said.

Romney's idea was described by a campaign spokeswoman as one of "a range of policy options" cited by the former Massachusetts governor as an "illustrative example."

The candidate is not the first to float such an approach, indicating it has appeal, said Alan Viard, a resident scholar at the American Enterprise Institute, a conservative think tank.

"Politically I think there is something attractive about that," Viard said, noting that a cap would spread the pain of curbing tax breaks more widely than other, narrower proposals.

Obama has called for a cap on itemized deductions of 28 percent of adjusted gross income for individuals earning more than $200,000 a year and families earning more than $250,000. The cap would apply to popular deductions such as mortgage interest and charitable donations, among the code's costliest.

Viard said of the two candidates' ideas, Obama's was "probably better designed."

Economist Martin Feldstein and Maya MacGuineas, a deficit reduction advocate, in April 2011 proposed a cap on tax breaks.


The notion of a cap is part of the federal finances debate dominating the campaigns ahead of the Nov. 6 elections for president and Congress. A key obstacle to tax reform for years has been special interest defense of tax breaks in the system.

Capping how much taxpayers can deduct from their taxes, rather than targeting deductions one by one, would distribute broadly the pain of curtailing tax breaks and loopholes and blunt the power of interest groups to fight back.

"It's interesting that all of these plans have kind of converged on that logic," Viard said.

Romney's cap idea, like others, would probably hit higher-income taxpayers harder than others. About 70 percent of Americans who file tax returns do not itemize their deductions. The 30 percent who do would be most affected.

There are minimum thresholds for itemizing deductions, but at the moment, the so-called Pease limits on itemized deductions are not in place. These were lifted in annual increments under the 2001 tax cuts under President George W. Bush. There were no Pease limits in 2010 and 2011 and there are none this year.

The limits, named for former Democratic Representative Don Pease who helped write them, are set to return in 2013 if Congress does not extend them again by the end of this year.

Romney's idea would toughen the Pease limits with a hard cap. "On one level, a hard cap is good politics because it avoids picking a fight with the interest groups that support each provision in the tax code," said Scott Hodge, president of the Tax Foundation, a business-oriented tax research group.

"High income taxpayers will clearly be impacted the most," Hodge said, characterizing Romney's idea generally as "a pretty crude way of going after ... deductions in the code."


On the campaign trail, Romney and Obama have seldom ventured beyond rhetoric on the fiscal issue. Romney's remarks on Tuesday were a rare instance of detailed discussion. More may be forthcoming in their first televised debate on Wednesday night.

The Obama campaign said on Wednesday that Romney's cap idea "would raise taxes for millions of middle-class families."

The 2013 federal budget will be about $3.8 trillion, but the tax code will only bring in $2.9 trillion, resulting in a $900 billion deficit. Congress has failed for many years to find a mix of spending cuts and tax changes to close the deficit.

The tax code has not been thoroughly overhauled in 26 years and is riddled with $1.1 trillion in tax breaks. Lawmakers have failed to fix the system on this front as well.

Romney has also proposed killing the alternative minimum tax and the estate tax, as well as cutting tax rates across the board by 20 percent. These proposals have met with persistent questions about how to pay for them.

A study from the centrist Tax Policy Center said Romney's plan would raise middle class taxes and lower taxes on the wealthy. The Romney campaign has criticized the study as flawed.

In addition, Romney has said he wants to make permanent the Bush tax cuts, set to expire at the end of the year in a confluence of potential calamities known as the "fiscal cliff."

Obama has said he wants to let the Bush tax cuts expire for the wealthy, but keep them in place for the middle class.

Citizens for Tax Justice, a left-leaning think tank, said Romney's idea for a $17,000 deductions cap would not prevent his other tax proposals from resulting in higher taxes for the middle class and lower taxes for the wealthy.

"There is simply no way that Romney could fill in the details of his tax plan in a way that will not result in huge tax cuts for the very rich," the group said in a statement.

In the Fox TV interview, Romney also said, regarding the $17,000 cap, that "higher income people might have a lower number" and he suggested other options might be ones outlined in the December 2010 Bowles-Simpson deficit reduction report.

That document called for lower tax rates and an array of changes in tax breaks meant to "broaden the base" of taxpayers.

(Additional reporting by Patrick Temple-West in Washington, D.C. and Steve Holland in Denver; Editing by Howard Goller and Carol Bishopric)