Many people receive a modest amount of capital income, and others enjoy huge salaries, but in general, capital income is concentrated among high-income recipients, relative to wage income. So a tax shift "from wealth to work," in John Edwards' felicitous phrase, is also a shift in tax burden from the better-off to the less well-off.

Less well-off in this case does not mean the poor or the working poor (with an exception to be noted shortly). The vast bulk of the individual income tax is paid by people above median income levels. The most recent data from the IRS has the share of the income tax paid by those below the median level of adjusted gross income (AGI) at less than 4%.1 As long ago as 1985, this amount was still under 8%. Of course, the chief reason is that those below the median don't have much AGI to begin with--14% of the total in 2003.

The federal individual income tax is not the tax that low-income people face. That distinction goes to the payroll tax, and to state and local taxes. About 20% of the payroll tax--$170 billion dollars this year-- is surplus to the Social Security and Medicare programs to which it is dedicated, so in that respect lower-income people are contributing general revenue. But this surplus dwindles to zero in a dozen years, and no proposals to increase the payroll tax on the average person have been heard. (It should be noted that the reduction of Social Security benefits is tantamount to a payroll tax hike, and benefit reductions are urged by the Bush Administration and others advocating the privatization of Social Security.)

The commission will seek to reduce or eliminate the deductions for state and local income taxes and home mortgage interest, and the exclusion for health insurance premiums paid by employers.  Any of these changes would significantly alter the tax liabilities of many individuals, even if the impact on average tax burdens or on tax shares by broad income classes were left unchanged. Reported estimates of effective tax rates--the share of one's income paid in taxes--are averages over large groups of taxpayers. These averages obscure a lot of variation in tax burdens within any income group. For instance, a family with income of $200,000 in the suburbs might carry a large mortgage; one in the city might rent an apartment and pay no mortgage interest at all. One worker may choose to "max out" his or her contribution to an IRA, another may forego that option altogether.

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Capping the deduction for mortgage interest strikes at the housing and real estate sectors, with benefits varying geographically. Mortgage interest deductions are higher where housing is more expensive--especially major cities and wealthy suburbs on the East and West Coast.

The current proliferation of deductions certainly increases the complexity and economic distortions of the income tax. In general, simplification in this realm could be beneficial. Unfortunately, the very uneven pattern of benefits arising from existing deductions is itself an obstacle to reform. One would not want to duplicate this pattern under a simplified system, and one could not in any case, while flattening these benefits makes for difficult politics.

Any specific deduction can raise additional, thorny issues. For instance, it does not necessarily follow that the more expensive the health insurance benefit, the higher-paid is the worker. Workers in hazardous occupations might carry more expensive policies than higher-paid workers in safer occupations. A cap on the exclusion for health insurance could hurt the fireman more than the stock broker. Efforts to fine-tune this tax provision defeat the purpose of simplifying the system. Another example is the mortgage interest deduction. Limitation could pop some regional housing bubbles, creating "upside-down mortgage" situations for many families.

  .  .  .  Paradoxically, AMT repeal would expand the value of some deductions for higher-income taxpayers, flying in the face of the commission's principle of capping the value of deductions or converting them into credits.

On the one hand, a common theme in the deductions the commission is targeting is an implied tax on the use of wages to finance consumption. (Health benefits, state and local public services, and housing are types of consumption.) With the other hand, the commission aims to reduce taxes on wealth and investment income, whether or not such income finances consumption.   .  .  .