Tuesday, October 6, 2015

Loopholes and Loonies

I love it when people use the word "loophole". It sounds so devious. I don't have a loophole but the rest of you big meanies have lots of them. I looked it up and here is what Wikipedia says
loophole is an ambiguity or inadequacy in a system, such as a law or security, which can be used to circumvent or otherwise avoid the intent, implied or explicitly stated, of the system.

That makes a loophole sounds pretty ominous. And so I found something on the Internet by Redditt when I searched for famous loopholes:
     You can legally drink with your parents anywhere alcohol is served regardless of your age,
     Park your car in your neighbor's property and the company can not repossess your car
     Put a few safety features on your golf cart and you can get the same tax rebate intended for full-fledged electric cars
    You can sue someone who has a liability waiver

These loopholes underscore the negatives of a definition that uses words like inadequacy, circumvent, avoid intent, etc. Kids are not supposed to order a JD on the rocks but apparently a parent can order one and give it to little Nolan at any bar and grill on the planet.  Now that’s a loophole.

So when I hear politicians and  most recently in the WSJ (Wall Street Journal, October 2, 2015, page A13) Alan Blinder infer that tax loopholes are egregious and destroy fairness, it makes me wonder how we could have created such an evil tax system.

So I wondered. I drank a little and wondered a little more. As usual these politicians and their hacks are using inflammatory words trying to fool us stupid voters. So let’s step back a little and figure out where all this is coming from.

Many politicians want to reduce tax rates. Hey Joe – I am going to reduce your tax rate. Gee Mr Congressman, thanks so much. I love you.

When you reduce a tax rate and tax revenues fall, then you have a larger government deficit.  Since we have a really big deficit and we often espouse smaller ones – this creates a conflict for Ms Congressman. But Ms Congressman isn’t a Congressman for lack of verbal verbosity. She fixes the problem by increasing taxes on people who usually won’t vote for him or her.  Cool formula – reduce tax rates on people you like and raise taxes on those you don’t. But even that does not sound good to Mr Congressman who wants a lot of votes. So he doesn’t say he is going to raise taxes – he says he is going to make things fairer and more efficient by reducing tax loopholes. Now that sounds cool to everyone.

That is where the loopholes thing comes into your TV and other news outlets. And here is where the disinformation campaign goes to work. Recall that we have a government. If we are naive we believe that somehow this wonderful government is fair and impacts us all the same. It taxes us each the same and then spends the proceeds on each of us equally.  Ha ha. If you believe that I am willing to sell you the Edgestar wine cooler that died one day after the one-year warranty expired.

Anyway, if you live on planet Earth you know that the government has many reasons why it never treats us equally. And if you were crazy enough to purchase a copy of the US Federal Tax Code you would see there are many reasons why Congress has passed tax and spending laws to favor some groups of people over others. If you are one of those people – perhaps a poor person who receives a disability payment or who uses the earned income tax credit – you would not go down Main Street proudly shouting that you have a tax LOOPHOLE that costs America tax payers about $60 bill per year. 

The dilemma we face at the end of 2015 because Mrs Congressman decided to put budget stuff off until the very end of the year is what to do about a budget in the year before a national Presidential Election. Candidates want to say they want more fairness and efficiency in the tax code and promise you they will close loopholes. But loopholes ain’t loopholes. These “loopholes” are carefully reasoned and voted upon parts of government. Not one of them that matters will be taken lightly. Not one of them can be erased by a Cheshire grin or a loud voice. But alas, these pusillanimous politicians who want to say they are for fairness and small government deficits will not close any real loopholes and of course will not continue to control government spending.

I am not against tax reform and am not against lower tax rates. I simply believe that tax reform and closing loopholes is much harder than it sounds. If politicians were more honest they would more directly say they are looking for ways to raise taxes to offset the loss of revenue that comes when they reduce tax rates. But alas such honesty is not easily found, even after an extended visit by the Pope. 

I end with a list of the largest tax breaks or “loopholes” to show you that this stuff has nothing to do with the Wikipedia definition I cited above. This list of the top 15 and the five year dollar value estimates come from Forbes. The numbers are billions of dollars estimated over five years. Imagine who might not like the removal of any one of these. Imagine the blow back associated with removing any of these so-called loopholes: 

Employee Paid Health Insurance $760
Lower Rate for Capital Gains  $616
State and Local Government deductions $431
Mortgage Interest Deductions $379
Tax-free Medicaid Benefits  $358
Workplace Retirement Benefits $336
Earned Income Tax Credit $326
Childcare Credit $292
Capital Gains Death Exclusions $258
Insurance Exchange Subsidies $238
Charity  $224
Interest on Municipal bonds $217
Employer Paid Benefits $193
Cafeteria Plan Benefits $193
Untaxed Social Security Benefits $180

1 comment:

  1. One point I could have made stronger is that most things we call loopholes are basically the way that government promotes economic growth, fairness, etc. They are the essence of government. To pretend that you can dabble with one or two of them and not replace them in some way is totally naive. What is a loophole to one person is a “fundamental right” to another one. It would be easier to just focus on the things that are busting the budget – spending on social security and medicare…and maybe Obamacare. Okay enough preaching.