The Republicans seem to prefer to increase revenues by limiting the deductions that can be taken by high-income people, rather than increasing the tax rate on higher incomes (and on income that is taxed at preferential rates, such as dividends and capital gains). There seem to be quite a few supposedly neutral commentators who think this is a reasonable approach. It isn't, and it is especially a wrong-headed approach for a party that supposedly wants to encourage state and local governments and private charitable organizations to take on more and more of the responsibility for responding to social needs.
My reasoning is below the orange squiggle.
Limiting deductions (for example, to $50,000) would cripple many charitable organizations in this country. At the present time, up to very high limits, each dollar of charitable contributions reduces a taxpayer's taxable income, and thus the income taxes they must pay. However, the actual cost to the taxpayer of donating, say, a million dollars to a university or non-profit hospital, would increase if deductions were limited as some have proposed. Conversely, increasing the tax rate on higher incomes, while continuing to permit relatively unlimited deductions, would actually encourage high income people to make more charitable contributions.
In addition to discouraging charitable contributions, limiting deductions, rather than raising marginal tax rates, would systematically penalize taxpayers who live in high tax states, because they have higher deductions for state and local income taxes and real estate taxes. Yet the high tax states tend to be the states that have good school systems, quality universities, and the best social safety nets. They also tend to be the states that send more tax revenue to the federal government than they receive back in federal spending.
The approach suggested by Warren Buffett in an excellent op-ed piece in the New York Times, published earlier this week. Raise the top marginal rates on those making more than $250,000 or (his suggestion) $500,000 per year, but also establish a minimum tax on all truly huge incomes, such as 30% on incomes from $1 million to $10 million, and 35% on incomes above $10 million per year.
This would continue preferential tax rates on things such as dividends and capital gains for anybody who can remotely be considered middle class, but would assure that the really wealthy would be paying a reasonable percentage of ALL of their income in income taxes. It would also continue to provide the wealthy with an incentive to make charitable donations, and wouldn't penalize them further for living in high tax states.