Jeb Bush’s just-released tax plan includes a host of changes that will keep tax-cutters happy: the top rate would drop to 28 percent; he’d eliminate the estate tax, cuts the corporate tax rate to 20 percent, and eliminate Obamacare’s 3.8 percent tax on investment income. All of those cuts would increase the deficit, of course, and to offset those costs, Bush wants to close loopholes.

The plan may sound a lot like Mitt Romney’s 2012 tax plan, which—while he never said it—would have increased the deficit by trillions of dollars. Many commentators have concluded similarly about Jeb’s proposal.

But the full plan includes one very significant change not mentioned in the Wall Street Journal op-ed where Bush announced his plan—one that would likely raise more than a trillion dollars in revenue over a decade, and secretly accomplish a policy goal sought by everyone from President Obama to Paul Ryan.

The change: Bush wants to limit itemized deductions sharply, capping them at 2 percent of aggregate gross income, and eliminate the deduction for state and local taxes entirely. (The exception would be the deduction for charitable giving, which is politically toxic to attack, and would still be unlimited.)

What does this mean? For one thing, it would bring in a lot of money. It’s hard to know exactly how much, but the Congressional Budget Office projected in 2013 that the deduction for state and local taxes alone will cost the federal government $1.1 trillion from 2014 to 2023. In an April 2011 paper, Harvard economist Martin Feldstein and two co-authors calculated that a 2 percent cap on itemized deductions would raise $278 billion a year. But that figure assumes a few changes Bush’s plan doesn’t make, including the deduction for charitable giving, the exclusion for employer-sponsored health insurance and the Child Tax Credit in the cap. When those are accounted for, the cap would add around $54 billion a year to people’s taxes—or, realistically, something less than that, since the Bush plan also doubles the standard deduction, ensuring that 34 million fewer Americans would choose to itemize their taxes. It’s not enough money to offset the rest of Bush’s plan, which would almost certainly increase the deficit. Still, the extra $1-1.5 trillion he raises over a decade from curtailing itemized deductions is a significant shot of revenue for the government.



But it’s the politics of the cap that make it really interesting. If you look at who would actually be affected, it appears that the cap is a very benign-sounding way to do something politically difficult: limit the mortgage-interest deduction.

Of the $54 billion a year the cap would raise according to the Feldstein estimate, $46 billion comes out of the mortgage interest deduction. Curtailing the deduction has long been popular among economists, since the academic evidence shows that the deduction doesn’t increase the rate of homeownership, instead just increasing the size of homes. But the real-estate lobby has successfully beat back recent attempts to curtail it. In his 2014 budget, President Obama proposed capping all tax expenditures at 28 percent, including the mortgage interest deduction. Former House Ways and Means chairman Dave Camp proposed reducing the cap on the mortgage interest deduction from $1 million to $500,000. And current Ways and Means chair Paul Ryan has also talked of curtailing it.

Through all of this, the deduction has endured. Bush’s complex way of capping it may be just what’s needed to overcome the politics that have made it nearly impossible to touch.

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