But while rate increases will now only affect incomes over $400,000, taxes will still go up on those making $250,000 through the mechanism of reducing maximum allowable deductions. According to the Wall Street Journal, the amount an individual making $250,000 per year, or a married couple making $300,000 a year, may deduct from their income through items such as charitable contributions or mortgage interest deductions will be reduced by 3 percent for any amount above that threshold:
A couple with income of $400,000 average about $50,000 in itemized deductions, according to IRS statistics. Because their income would exceed the $300,000 threshold by $100,000, their allowed deductions would be reduced by about $3,000 to $47,000—potentially boosting their tax bill by about $1,000.This could actually be viewed as a significant win for progressive taxation: Middle-class households will still be able to take full advantage of their deductions, but as one's income increases, the amount one is able to deduct gets gradually reduced, up to 80 percent of the total deductions available.
From a political standpoint, the limits allow the Obama administration to achieve its long-sought goal of raising taxes on people making more than $250,000. PEP and Pease represent about $150 billion of the tax increase of about $620 billion over 10 years, making them a key element of the deal.
Some people are not happy about these new limits on deductions, including Republican consultant and former press secretary of George W. Bush, Ari Fleischer:
Economics is the study of incentives, so it stands to reason that no matter how noble the cause, people will be more likely to engage in a particular action if they receive an economic benefit for doing so. Still, only a particularly uncaring person would actively proclaim that he would donate less without a financial incentive to do so, lest he be considered selfish, uncharitable and unfeeling. But then, this is Ari Fleischer.
The bigger irony behind the laments of Fleischer and his ilk about their reducing incentives for charitable giving is that so many Republicans seem to believe that charity can substitute for the social safety net, particularly as it applies to health care. During the midst of the debate about health care legislation back in 2009, current Majority Whip Eric Cantor, Sen. Tom Coburn both said at Town Hall events that charity was an adequate solution to the problem of uninsured people—a claim repeated by retired Rep. Ron Paul during his campaign for the presidency. One wonders if Tom Coburn or Ron Paul have ever contemplated how "neighbors helping neighbors" could adequately manage the crushing expenses that months or years of extensive treatment for cancer or other conditions can impose, but then, nobody ever accused today's Republicans of being very well grounded in reality.
Ultimately, then, conservative ideologues want to see charity take over the role of the social safety net, but won't fund the charities that would theoretically perform these services unless the government pays them to do it through ample tax deductions. Compared to that, just paying for health care directly seems much more efficient and cost-effective. But that wouldn't let rich people be nearly as tax-advantaged, so there's no way Republicans would put up with it.