Triumph of a Dysphemism

by Kevin D. Williamson

While “new revenue” has triumphed as a euphemism for “tax hikes,” “loophole” has triumphed as a dysphemism for “intentional tax policy.”

Our tax code is not really all that riddled with loopholes. Loopholes, properly understood, are unintentional ambiguities in a system that can be exploited to undercut the intent of the system’s designers. What we’re talking about in the tax code is not, for the most part, a collection of loopholes. The mortgage-interest deduction is not a loophole; it is the product of intentionally (and stupidly) constructed public policy, an attempt at social engineering through the tax code. Likewise, most of what Democrats dishonestly describe as special breaks for oil companies are in fact tax subsidies designed to encourage domestic manufacturing, and available to any firm that engages in anything that can be defined under the law as manufacturing. This is not an accident, either: The geniuses in Washington think that they can politick good manufacturing jobs into existence.

The one really significant loophole is the carried-interest treatment of private-equity fund managers’ (and, to a lesser extent, hedge-fund managers’) income. Because of the way these fund mangers’ compensation is structured, they pay in many cases the long-term capital-gains tax rate (15 percent) on income that looks to some people more like a performance bonus or a royalty than a long-term capital gain. (I have read a fair amount about the issue, and I have not been able to make up my mind about whether the treatment should be changed. The Treasury Department has argued that the current treatment is appropriate, unseemly as it looks.) The designers of the tax code did not (of course!) foresee the way firms would react to the incentives they built into the code, but it seems to me likely that they did not intend to create a system under which a relatively small number of financial professionals pay a lower marginal tax rate on multimillion-dollar incomes than many Americans pay on much more modest incomes.

But for the most part, what everybody is calling “loopholes” are intentional features of the tax code. And all of the tax subsidies Democrats want to add to the tax code — for “green energy,” “protecting American jobs,” “energy independence,” or any other sort of ignorant superstition — will one day be “loopholes,” too: just as soon as some politically disfavored business (say, an oil company) begins to make use of them.

Remind me again why we just put the geniuses who designed our tax code in charge of our health care.