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6 ways to make tax reform happen

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2. Convert itemized deductions into refundable credits

Itemized deductions are often called “upside-down” subsidies. They encourage some taxpayers to spend money on housing, charitable contributions, and to support higher state public expenditures, but the structure of the subsidy is perverse.

High-income taxpayers who are in the top tax bracket (39.6 percent in 2013) receive the largest subsidy – because an additional dollar spent on mortgage interest or given to charity costs them only 60.4 cents. And the two-thirds of tax filers who use the standard deduction or have no income tax liability receive no subsidy at all.

Instead, if Congress wants to motivate certain behavior, it should use refundable credits that provide the same benefit to everyone, regardless of income. The Bipartisan Policy Center recommends converting the deductions for both mortgage interest and charitable contributions into 15 percent refundable credits.

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