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.