Each of the following expenditures is a deduction for the purposes of calculating a person’s federal income tax liability:
a. Mortgage interest
b. State and local taxes
c. Charitable contributions
If the income tax base were broadened by eliminating these deductions, tax rates could be lowered, while raising the same amount of tax revenue.
For each of these deductions, what would you expect the likely effect on taxpayer behavior to be? Discuss the pros and cons of each deduction from the standpoint of efficiency, vertical equity, and horizontal equity. Would you keep or eliminate the deduction?