Taxes, Deductions, and the Rich

12.04.12

The Fiscal Cliff's Upper Class Battle

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Here's a way to understand the otherwise seemingly arcane debate about whether to raise revenues by limiting deductions or raising tax rates.

An upper-income Texan probably does not have very many deductions. The deduction for state and local taxes does not much interest Texans. There's no state income tax. The total state and local tax burden ranks 45th in the nation, according to the Tax Foundation.

Nor is the mortgage interest deduction a matter of life or death. Housing prices are comparatively cheap, even in the most expensive neighborhoods. (The median home price in River Oaks, Houston, is $931,000, according to this Realtor website.)

What Texas does have, however, is a lot of very high incomes who care a great deal about tax rates.

A New Yorker or Californian earning the same high income as that Texan, on the other hand, does pay a lot of state & local taxes, and likely carries a more substantial mortgage.

Deductions vs. rates is a Red State rich vs. Blue State rich battle.

It is also, as I outlined during the campaign, a battle between "ordinary rich" and super-rich: deductions matter a lot more to people earning $400,000 than to people earning $4 million or $40 million.