What would be the broader economic impact of eliminating all personal income tax deductions in the United States, across the board? Take two basic scenarios: a) eliminating all income tax deductions, and leaving tax rates the same, increasing tax revenue as well as effective marginal tax rate; or b) eliminating all income tax deductions, and lowering marginal tax rates to keep tax revenues the same.
It seems that most deductions are regressive, as the wealthy have greater opportunity to take advantage of them, both because they have more money to put into buying a home, donating to charities, saving in a 401k, and so forth; and because they can afford a tax professional to maximize their deductions and minimize their tax burden.
I can think of some obvious, direct consequences, but I don't have the economics background to guess what the broader impact would be. First to come to mind:
- Companies like H&R Block, Intuit, and the like, would feel serious pain, as would smaller independent CPAs.
- The middle and upper classes would save time and money due to simpler tax returns they could prepare themselves easily.
- The IRS' costs would be reduced dramatically, as improper deductions are the primary cause for audits, and take up the most time during an audit, of a personal income tax return.
- Some IRS employees, both auditors and those processing tax returns, would lose their jobs as less labor would be required by the IRS.
- All those businesses that benefit from deductions would take a hit; mortgage lenders, real estate agents, nonprofits, religious institutions, automakers, energy-efficient appliance and building supplies manufacturers, and so forth.
- Lobbyists whose tactics revolve around arranging advantageous tax deductions for a given industry would be impacted - this may be good or bad depending on your point of view.
These are the obvious things that might happen within months of such a change in tax law. My question is: what happens next? Is there some dire consequence I'm not seeing? The societal advantage of tax deductions seems next to nil to me.