by STEVE GOLDSTEIN
Goldman Sachs’s Alec Phillips has done some number crunching on how a fiscal-cliff deal may be struck, and he says there just isn’t that much room to maneuver regarding tax rates for those making above $250,000.
In a research note, he says a significant “down payment” of revenue will be part of a year-end bill, even if both sides fudge on the broader issue of tax reform. The bulk of the Bush tax cuts for upper incomes will have to go.
“While we would expect that the White House would be slightly flexible on the top rate–either accepting a higher threshold or perhaps a slightly lower rate than initially proposed, it seems unlikely that the President would accept an agreement that does not include most of the revenue that would be gained from expiration of the top two tax brackets (i.e, $836bn over ten years),” he wrote.
As for other compromises, there are a few alternatives. One would be a phaseout of deductions based on income, which if applied at a 3% rate for every dollar over a threshold, could raise $121 billion over ten years. Another would be a limitation of the value of deductions to the benefits as if they were in the 28% bracket. (For example, a taxpayer with a 36% rate who deducts $10,000 would lower her tax liability by only $2,800 rather than $3,600, Phillips said.) That could raise $573 billion over a decade.
Finally, a dollar cap on itemized deductions, as proposed by Republican presidential candidate Mitt Romney, could raise $1.29 trillion over 10 years if applied at a $25,000 cap.