Let's Be Honest: No One Is Closing Tax Loopholes

The problem isn't that wealthy oil barons or special interest lobbyists love loopholes (they do); it's because we do.

After the lack of journalistic vigor displayed during Barack Obama's magnificently ambiguous 2008 campaign, it's comforting to see so many reporters clamoring for details about Mitt Romney's policy proposals.

Romney, you see, has a tax plan -- a vague plan that relies on the sound notion that tax cuts can generate economic growth and even, consequently, raise revenue. Many in the media disagree. But as Harvey S. Rosen, an economist at Princeton University, recently wrote, "under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same."

The problem is that keeping the plan revenue-neutral on paper can be achieved only by closing tax loopholes. Which loopholes? We don't know. Romney, as vice presidential candidate Paul Ryan explained, believes "the best way to do this is to show the framework, show the outlines of these plans and then to work with Congress to do this. That's how you get things done."

This might be solid political reasoning, but in reality, it's not going to happen. And the problem isn't that wealthy oil barons or special interest lobbyists love loopholes (they do); it's because we do.

There are numerous arguments for closing loopholes or eliminating most "tax expenditures" and deductions. Liberals argue that under this system, the wealthy and corporations make out like bandits. Free market advocates argue that loopholes can often distort the market by incentivizing the wrong kind of activity. Many argue that simplifying the tax code would save Americans tons of money and create a more equitable system. Others contend that these tax loopholes are "costing" -- as if Washington had some divine claim to your money -- the federal government about a trillion more dollars a year.

But any tax expenditures, or loopholes, worth undoing already enjoy huge support from the electorate.

Will anyone really eliminate the 401(k) exemption, which allows us to park tax-free dollars in a retirement fund? Or how about that mortgage-interest tax deduction, which allows us to deduct interest from our taxes, or the capital gains exclusion, which allows us to keep any profit we make on our homes? What about the deduction for state and local taxes? How about charitable deductions?

Even completely counterproductive loopholes will be tough to eliminate. Take the preferential tax provisions offered to employer-sponsored health insurance. Because Obamacare didn't bother to get rid of it or extend it to individuals, many Republicans believe eliminating it would only induce more employers to drop employees into those government-run fabricated "exchanges."

It's not that Obama doesn't favor closing loopholes. He has, for instance, made the gutsy suggestion to eliminate "corporate jet" loopholes, from which we could fund government for a few hours. Because when the left says loopholes, it means any provision that helps big business or fat cat bankers -- anything, in other words, that encourages investment. One of the most often cited of these loopholes is "carried interest," which allows hedge fund managers and others at investment firms to pay capital gains tax rates rather than income tax rates.

In 1986, Ronald Reagan and a Democratic Congress eliminated dozens of loopholes cluttering up the tax code. They eliminated them across all income levels -- something that seems undoable in Washington today. If closing loopholes is a tool for more wealth transfer and populist histrionics, then really there is no point. Real reform on loopholes would need bipartisan agreement and a bit of courage from both sides. So please, don't hold your breath.

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  • 21044||

    There are no loopholes, only poorly written laws.

  • 21044||

    Oh yeah, First!

  • Rich||

    Until the tax code is "fixed", as ~everybody ~perennially bitches about but ~nobody ~ever acts on, every incumbent should be voted out.

  • Dr. Frankenstein||

    Regardless if you manage to close the loopholes Congress will just put new ones or even the same ones back in. That said I don't see anything wrong with some sort of sunset/reset/jubilee law that says after 20 years all the deductions get eliminated and force the Congress to vote them back in again.

  • SugarFree||

    Sunset every 2 years. Keep those fuckers occupied.

  • Dr. Frankenstein||

    O.k. every two years. I can be reasonable.

  • Mike M.||

  • CampingInYourPark||

    "There are numerous arguments for closing loopholes or eliminating most 'tax expenditures' and deductions. Liberals argue that under this system, the wealthy and corporations make out like bandits."

    “'How could he do this to businesses as a business guy?' Joe Casey, then a top executive at a Massachusetts bank, Seacoast Financial, recalled asking colleagues whose companies had to pay up after the Romney administration closed a tax loophole. 'It was very aggressive, and it was a surprise.'
    For the next three years, the Romney administration relentlessly scoured the tax code for more loopholes, extracting hundreds of millions of corporate dollars to help close budget gaps in a state with a struggling economy."

    http://kaykhan.org/index.cfm/p...../pid/10234

  • CampingInYourPark||

    "Real reform on loopholes would need bipartisan agreement and a bit of courage from both sides. So please, don't hold your breath."

    Sort of like what you have to do in a state with 85% of the legislature being members of the opposition party.

  • Stormy Dragon||

    Closing loopholes is great, if the savings are used to lower marginal rates in such a manner that most people don't face a higher tax burden. Using it to fund a decrease in the capital gains rate so that most people see their taxes go up is not.

  • CampingInYourPark||

    "Using it to fund a decrease in the capital gains rate so that most people see their taxes go up is not."

    Who is proposing a decrease in the capital gains rate for upper income people?

  • Stormy Dragon||

    Romney. I already pay a higher income tax rate that he does, and his plan seems to be to kick my rate up even higher to lower his.

  • CampingInYourPark||

    "Romney. I already pay a higher income tax rate that he does, and his plan seems to be to kick my rate up even higher to lower his."

    Romney proposes to eliminate capital gains taxes for incomes below $200,000 a year and keep the rate at 15% for incomes over. He makes a lot more than 200,000 a year.

    "Romney’s critics object most ardently to his plan to maintain or reduce further the tax rates on capital gains and dividends. The plan calls for maintaining the current 15 percent tax rate for those earning more than $200,000 and eliminating taxes on all investment income including interest for those earning less than $200,000."

    http://taxfoundation.org/artic.....lans-stack

  • Stormy Dragon||

    Romney proposes to eliminate capital gains taxes for incomes below $200,000 a year and keep the rate at 15% for incomes over.

    Capital gains is a tiny fraction of my income, and most of the gains I don't pay taxes on anyways because they're in a 401k. Setting the capital gains rate to 0% saves me maybe $10 a year, which is hardly a replacement for the thousands of dollars in extra taxes I'd have to pay for losing the mortgage interest deduction.

    That's the same for most people who aren't trust fund babies that are living primarily off of capital gains.

  • ||

    Your argument is still classist bullshit. Nobody is stealing your money to lower Romney's tax rate. You and he are subject to the exact same income tax rates, and he would still remain subject to the same cap gains rate he pays now. Fuckheads like you are the reason there will never be real tax reform in this country, because you'd rather cling to your pittance and screw those abusive richies than establish a better system from scratch.

    Btw, who gets "robbed" to "pay for" your mortgage interest deduction? (If you answered "no one", you're correct, but your prior argument is moot. Which is it?)

  • Jackand Ace||

    Great, David. Now that we know you are sure that the Romney/Ryan tax plan is complete BS, can you tell us what the Libertarian candidate's tax plan is? You know, Mr. Johnson. They guy who is never mentioned here.

  • ||

    Gary Johnson supports eliminating the IRS and implementing the Fair Tax.

    That was easy.

  • EugenePatrickDevany@gmail||

    Eliminating the $1.3 trillion in tax expenditures would be a good start at tax reform but shaving a few points off the individual and corporate income tax rates may not be enough of a political trade-off to send all the loopholes into the sea. More importantly both the left and the right keep bragging about the special favors they support for this group or that – and that is a major political problem. The other is the economy that has left half the country with only $3 for every $10 they had in 1995. It is called a wealth gap, it is caused by the tax code and it is the reason we have an economic crisis that resembles the Roaring Twenties.

    If we added a ”revenue neutral" 4% VAT we could reduce the corporate rate to 8% and that prize might even persuade big oil and big wind to give up their perks.

    If we added a "revenue neutral" 2% net wealth tax (excluding $15,000 cash and retirement funds) we could reduce the individual income tax to 8% and further encourage business investment by eliminating the capital gains and estate taxes.

    The expanded 2-4-8 Tax Blend produces the lowest tax rates but the icing on the cake is abundant new jobs. Payroll taxes (including the higher taxes on the self employed) are eliminated so business has 7 1/2% more to spend on labor and workers have 7 1/2% more take home pay to stimulate the economy. Any economist will tell you that means millions of new private jobs with no government spending.

  • SugarFree||

    Or we could cut back on the $124,000 per second that government spends.

  • Chupacabra||

    That's just crazy talk.

    "Stop spending money" is way more complicated than Eugene's elaborate VAT. Plus, everyone loves tax increases.

  • Stormy Dragon||

    further encourage business investment by eliminating the capital gains

    I've actually come to question whether capital gains ought to be taxed any less than other income. I know in theory that this is supposed to encourage investment, but there's three problems:
    1. You only get capital gains when you sell an investment vehicle. So the lower rate doesn't actually reward making an investment, it rewards you when you STOP making an investment.
    2. You only pay capital gains taxes on investments that have already paid off. If we are gonna subsidize investment, why reward the ones that pay off wildly and thus don't need subsidy?
    3. The current setup makes punishes people who actually put more goods and services into the market in favor of people who just live off moving money around.

    I think a better option would be to tax capital gains as regular income and instead allow investment purchases to be deducted from income in the year that the purchase is first made. e.g. If I buy 100 shares of stock at $2 per share, I could deduct $200 from my AGI.

  • Stormy Dragon||

    A few other benefits from this plan:

    1. We can get rid of 401ks and IRA since essentially all investments are bought with pretax dollars
    2. We don't have to worry about the complications of tracking the cost basis for securities we sell. Since I got my $200 credit when I bought the stock, when I sell it I just pay income tax on whatever the total selling price was. I don't have to worry about what purchasing lot each of the particular shares came from.

  • ||

    Cap gains on investments held for less than 1 year are already subject to regular income tax rates. The rate for long-term cap gains is the same as for dividends because it is assumed that the underlying taxable entity paid corporate taxes during the period you owned it which affected its value.

  • Ogemaniac||

    You missed the biggest reason to get rid of the preference for capital gains: it results in endless tax scheming.

    Indeed, almost all the tax dodging the rich engage in can be boiled down to either trying to turn earned income into capital income, or moving income offshore. Getting rid of the preference for capital gains would eliminate half of this.

    Your last idea won't work, though. You'd have an infinite pile of scheming around trying to turn all your purchases into "investments".

  • ||

    Alright! New taxes! I love that idea. Because I know congress will definitely never raise those rates from where they start. And I know for sure that they will lower other rates in return for passage of the new taxes too. I totally trust them.

  • BMFPitt||

    I've always found this argument to be absurd. Nobody is asking for X new tax now and a vague promise of repealing other taxes down the road. They're asking for a single bill that abolishes one tax and replaces it with another.

  • ||

    And the problem isn't that wealthy oil barons or special interest lobbyists love loopholes (they do); it's because we do.

    It's more that I hate fractional slavery, and loopholes can cut down the slavery somewhat.

  • sasob||

    And the problem isn't that wealthy oil barons or special interest lobbyists love loopholes (they do); it's because we do.

    We have loopholes because congressmen hate to pay taxes also.

  • b-rad r||

    and the worst offenders are the liberals/progressives who have the mantra of "make the rich pay".

  • BMFPitt||

    Will anyone really eliminate the 401(k) exemption, which allows us to park tax-free dollars in a retirement fund? Or how about that mortgage-interest tax deduction, which allows us to deduct interest from our taxes, or the capital gains exclusion, which allows us to keep any profit we make on our homes? What about the deduction for state and local taxes? How about charitable deductions?

    I'd let it all go if we could wipe the slate clean and lower base rates accordingly. A per-head standard deduction and that's it. Even though I can see perfectly logical and valid reasons for some other stuff, that just opens to door to getting right back to where we are now.

  • Kroneborge||

    Which is of course why we need to go to the Fair Tax

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