30 November 2012

Loopholes aren't

Politico | Lauren French | Tax loopholes alone can't solve fiscal cliff

Raise revenues and reform the Tax Code? Easy — just eliminate all the tax loopholes, right? Good luck with that.

“Eliminating loopholes” sounds a lot better than “raising rates”: The tax rate is what I pay, and a loophole is what the other guy gets.

But the biggest loopholes in the U.S. Tax Code — generally referred to as tax expenditures — aren’t just the tricks of the trade for millionaires with offshore bank accounts. For the vast majority of Americans, they’re just how things work: You don’t pay taxes on your health insurance or Medicare benefits; you contribute tax-free to your 401(k); and your mortgage interest pushes down your tax bill each year.
(1) "Loopholes" is a red-flag word. When I hear it I immediately raise my estimation that the person talking is either confused or deceitful. Most of the time when people say "loopholes" they're really describing an intentional feature of the system. This is what "loophole" actually means:
"A way of escaping a difficulty, especially an omission or ambiguity in the wording of a contract or law that provides a means of evading compliance."
The mortgage interest deduction, as much as a dislike it, it not an omission, and it's not ambiguous. It's very, very explicit. It's no more of a "loophole" than the income tax itself.

(2) Yes, you do pay taxes on 401k contributions. You just pay them later. The timing is irrelevant; they're still taxed. Maybe we should tax retirement savings now, maybe we should tax them later. But it's not a "give-away" and it's not "costing the government money." It's certainly not an "upper class entitlement." Sure, high earners avoid more taxes now. Then they pay more taxes later.

(3) You don't pay taxes on health insurance if your employer buys it for you. This is terrible way to do things. Unfortunately ObamaCare doubled down on the link between employment and insurance instead of fixing this illogical, historical accident.

(4) Paying taxes on Medicare benefits seems a little silly to me. Why do we want the treasury to write people checks with their right hand then snatch back a portion with their left? Am I missing something? Sure, doing so would technically "raise revenue" but only in the most facile, myopic way. Is this just because we're incapable of admitting that we ought to be writing smaller checks in the first place? (5) The mortgage interest deduction is flat out dumb. I have a hard time imagining a worse way to structure that system. Dumb, dumb, dumb. Why are we rewarding this particular form of indebtedness? There are a thousand ways we could do this better.

(5) Capital gains rates are not a "loophole" either. They're there on purpose.* Investment income has already been taxed, back before the money was invested. It's being taxed a second time (or more, when you consider corporate taxes as well.) The fact that you pay 15% on your gains instead of 35% or whatever doesn't mean the treasury is being cheated out of 20% because of some "loophole." There's no reason to think that when the IRS takes a second bite that it needs to be the same size as the first bite.

(* Some of the stuff with sweat equity and the way financial workers are compensated is a little dodgy. There are some loopholes there. But as a general rule, no. Capital gains taxes are just The Rules of the Game, just like income taxes and property taxes and sales taxes.)

PS French actually does mention some of this stuff later in her piece, like the tax benefit of health insurance only coming into play when your boss buys it for you. But I'm too wound up to go through and excerpt from all over her article and respond.

PPS No, I take that back. I can't resist commenting on two things later in the article.
• The earned income tax credit — $58.4 billion

[...] But recently, deficit hawks have balked at the $4.2 billion the [EITC] has paid out to ineligible illegal immigrants as a reason it should be taken off the books.
Here's a bright idea: how about you don't pay it out to illegal immigrants? (Or any non-citizens, for that matter.) Far be it from me to expect the IRS to run a tight ship, but you know, just maybe, maybe... it might be possible to operate this program correctly rather than just scuttling the whole thing?
• Exclusion of gains at death and the gift carryover exclusion — $51.9 billion

These exclusions allow hundreds of billions of dollars to transfer hands tax-free through gifts and inheritances, a huge revenue loss for the government.
You ever read Pillars of the Earth? I feel like I'm living in that medieval morality, tax-wise. "Oh, you want to ford this river? Well starting today you have to pay a tax to the king for doing that. You want to hold a flea market? The bishop demands a cut for granting you the privilege. You're gonna shear a sheep? Can't do that until you pay the baron his fee." It all seems to boil down to: we need money; a thing is happening; let's make anyone doing that thing pay us. No rhyme or reason.

That's how I feel when people talk about gift and estate taxes. As if every time money changes hands the fisc has some natural right to step in between the two people and demand a rake. The current gift-and-estate tax regime is screwed up in a lot of ways. But I can't abide this idea that whenever money changes hands the state has the right to siphon some off. What's worse is thinking that not only do they have the right to, but that whenever they don't do that they're somehow being cheated.

1 comment:

  1. Progressives feel like the govt is owed a piece of the action on every transaction because they believe that without the govt, none of the transactions could take place. Govt supposedly is the source of all that is possible, and therefore it should get a cut from whatever activity takes place.

    I don't agree with this axiom, but you can see it in the latest Ralph Nader OpEd in the WaPost where he talks about instituting a tax on financial transactions. I wonder what he would think about a tax on donations to self-proclaimed "public interest" organizations?

    Minor comment: Could you add Discus to your profile list, so that I could use my own ID rather than the joint one with my spouse?