How to Cap Deductions Correctly
Matthew Martin 1/15/2013 04:00:00 PM
Here is the wrong way to limit deductions: Pass a law declaring that people who make over, say, \$500,000 per year cannot claim any deductions. This is wrong because it violates the most fundamental rule for any tax code: increasing your pre-tax income should always, always increase your after-tax income. But this reform proposal violates this rule. To see how, just suppose that you are making \$499,999 per year and claiming \$10,000 in deductions. Your boss offers you a \$1 raise. Now you make \$500,000 per year and can claim \$0 in deductions. With a top marginal tax rate of 39.6%, that means that a \$1 raise actually made you \$9,999.60 poorer.