President Barack Obama is right; we need to get rid of tax loopholes. But which loopholes?
And what’s a loophole?
It’s today’s great political paradox: Everyone is against loopholes, except that person’s own. We could go a long way toward ending the government’s Ponzi scheme if everyone could stop talking in generalities and get down to which loopholes to terminate.
The problem is that one person’s tax loophole is another person’s legitimate incentive to help a good cause. For example, while Obama says the tax loopholes he wants to close are those that favor the wealthy and big corporations, he supports extending a tax break for corporate research and development. Clearly, such a tax break rewards companies, their stockholders and wealthy executives. But it also serves a broader purpose: promoting the nation’s economic competitiveness and creating jobs by encouraging innovation and the commercialization of new products and services.
So, which is more important: ending tax breaks for rich people or creating new jobs and boosting the nation’s economic health?
An astute reader, a retired patent attorney, put it beautifully in an email:
“I always think of a loophole as something a person or corporation takes advantage of because of a poorly written law or some unintended consequence of a well-written law. For instance, if Congress passes a bill that states, ‘If you will build an old folks home in a state that has an unemployment rate of over 10 percent, you will be permitted to depreciate the building on a double declining basis over a 20-year period.’ Presume a rich man builds such a home and takes advantage of this write-off; is that a loophole? To me it is incentive offered by Congress to encourage the construction of old folks homes.”
So, is it a loophole for rich investors to get tax breaks for building new factories in the United States for less than what they pay for a new overseas facility? Is it a loophole to allow Obama and his wife, Michelle — millionaires themselves — to give $48,000 in tax-free gifts to their daughters to fund their college educations? Such a loophole is available to us commoners only to the extent that we can sock away what little of our money is left, if any, after we pay our bills. There’s a social good in encouraging greater educational opportunities, but should rich people who can afford to pay for their children’s college education get financial assistance?
Should we end subsidies for rich developers to entice them to build affordable housing? No energy subsidies for domestic exploration to reduce our dependence on foreign oil, but hundreds of millions of dollars of loan guarantees for risky solar-power schemes? More millions of tax breaks for electric cars or advanced manufacturing?
Obama said he’s for dumping tax breaks for big oil and gas, hedge funds, corporate jet owners, special expensing rules, foreign tax credit benefits and certain manufacturing deductions.
Swell. Let’s do it, and, while we’re at it, eliminate many, most or all tax breaks. Even the ones that are necessary to advance social programs. Let’s head in the direction explored by the Simpson/Bowles debt reduction commission. Maybe even more: Replace the graduated income tax with a flat tax, with few or no deductions or exemptions.
This, of course, will raise howls from Democrats who justify tax breaks to their favorite recipients because without them all those “worthy’ environmental, social and economic goals never will be reached.
The problem is that just calling for an end to “loopholes” is simple-minded. It appeals to those who believe in emotional, unexamined solutions based on the notion that public policy questions can be answered with slogans.
Republicans, for their part, could do the nation a big favor by seriously discussing which exemptions, deductions, incentives, loopholes — or whatever you want to call them — they would eliminate or reduce. Their inability or refusal to confront this issue has cost them dearly in credibility.
Tax policy is so complicated we could be debating it for decades to come. Which is no excuse for not starting now.
Have PoliticalMavens.com delivered to your inbox in a daily digest by clicking here