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.
I agree!
By the way, did anyone here ask the government to "fix" health care? It wasn't on my wish list, and I fought hard to get them to stop insisting that I had asked for their changes.
The photo of Ms. Pelosi with her huge gavel made me think fondly of Maxwell and his silver hammer, actually.
Reply to this commentLinkReport AbuseWhen Nancy Pelosi first became speaker she said "The children of America now hold this gavel" or something like that.
Rush Limbaugh or somebody like that should have responded "I couldn't agree more."
Reply to this commentLinkReport AbuseChildren in Congress with the gavel, not unlike unleashing a hyperactive three-year-old on a sugar high upon a china and crystal shop with a ball-peen hammer.
Reply to this commentLinkReport Abuse"Remind me again why we just put the geniuses who designed our tax code in charge of our health care."
Geniuses can do anything!
Why, just ask them!
Reply to this commentLinkReport AbuseGreat point, and one that has gone too long without being made.
Given the tax-code is literally thousands (perhaps tens of thousands) of pages long, I'm sure there are some legitimate tax "loopholes". How could there not be? But, however many there are, they pale in comparison to the holes in the code that are intentionally placed there.
I also think this highlights the Quixotic nature of "tax reform". There will never be substantive tax reform because the tax-code is what generates power to fund-raise for both sides of the aisle.
If, by law, every single business is, and must be, treated exactly the same under a unified tax-code, then the demand for lobbyist (and their money) would be halved, or more. That's not going to happen.
Reply to this commentLinkReport AbuseI thought that's what "General Welfare" and "Equal Protection" meant, but apparently not when applied to tax code loopholes and social engineering.
Reply to this commentLinkReport AbuseLet's make it happen while "we the people" still have a voice.
Reply to this commentLinkReport AbuseWilliamson: "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."
I see this issue exactly the other way around. Good tax policy should be as neutral as possible with respect to economic activity, that is, it should not distort economic behavior.
Interest is compensation for lending money. Some people and organizations (principally mature ones) have more money than opportunities. Other people and organizations (principally young ones) have more opportunities than money. The interest rate resulting from the equilibration of supply and demand for money is the price for money that results in its flowing frictionlessly to the highest and most productive uses.
If interest income is taxed and interest expense is tax deductible, then there is no friction (other than caused by differential tax rates on lenders and borrowers). Thus symmetrical tax treatment causes the least distortion in the allocation of money.
If interest income is taxed but interest expense is not tax deductible, then there is distortion: there will be less demand for loans (raising the price reduces the demand) and the interest rate will decline. (It will still be higher for the borrower (because of loss of the tax deduction), but it will be less remunerative for the lender.) Both lenders and borrowers will be worse off and the economy will be worse off because the suppressed level of lending activity will result in suboptimal money allocation.
Seen from this perspective, withdrawing the tax deduction for interest (all interest, not just mortgage interest) is an attempt to reduce borrowing for the perceived good of the borrowers and is accordingly an attempt at social engineering.
Moreover, the mortgage interest deduction is a benefit only to the middle classes; the rich get no benefit (if by "rich" you mean people with investments sufficient to sell enough to pay off their mortgages, thus achieving the same tax effect as deducting the interest).
My interest in this topic is only conceptual, as I paid off my home mortgage many years ago.
Reply to this commentLinkReport AbuseNot even then: as soon as Democrats want the money. It's not a bad strategy: First raise taxes but soften the pain with a bunch of tax credits to draw in moderate Republicans. Then enlist the kind of conservatives who hated the credits in the first place to agree that they are "tax expenditures", and get rid of them - but not to reduce general tax rates.
Abracadabra! Endless "new revenues".
Reply to this commentLinkReport Abuse"Last night deficit reduction targets were cut from $4 trillion to $2 trillion over the next decade, in exchange for a $2.4 trillion debt ceiling hike, which will last the Treasury until the next presidential election. Said otherwise, the Treasury needs to fund a $2.4 trillion hold over the next 15 months. Over a decade this come to $20 trillion: ten times more than the proposed deficit reduction."
From: External Link
What do you think of that article, Kevin?
Reply to this commentLinkReport Abuse"Remind me again why we just put the geniuses who designed our tax code in charge of our health care."
I'm sure that was rhetorical, but I'll answer anyway.
The answer is that, sadly, all but about 10% of the electorate believes that mercantilism is practical, and most of that 90% has zero interest in any moral aspects of the subject.
Reply to this commentLinkReport AbuseAs I've always said, the greatest legacy of this administration is that it openly declared war on the English language.
Reply to this commentLinkReport AbuseThink of it as Obamaspeak. Orwell's phrase "newspeak" is probably better, but one has to entertain the thought that the intent of this Administration is identical.
Reply to this commentLinkReport AbuseI am a lawyer with an LLM in tax law and you're absolutely right! Loopholes are very rare. In fact, the IRS and the courts have developed specific legal doctrines that defeat any perceived loopholes (e.g. "economic substance doctrine" and the "step-transaction doctrine"). Basically these doctrines stand for the proposition that if the purpose of a transaction is solely tax avoidance, it can be considered a tax avoidance device and disregarded by the Service.
All the 'goodies' (and most of the complexity) of the tax code is the result of political favors and arrogance, little more.
Reply to this commentLinkReport AbuseDon't hold your breath waiting for the MSM (i.e., adjunct DNC communications department) to 'clarify' the issue.
PS...And don't tell Tesla Motors that they are taking advantage of a 'loophole'. They know better; they know they are taking advantage of their monetary support of President Pathetic.
Reply to this commentLinkReport AbuseKevin: In defense of the capital gains tax treatment for carried interests, if the investment partnership did not reallocate the carried interest share of profits from the limited partners to the general partner, the limited partners would definitely be eligible for capital gains treatment on any type of partnership income that so qualified as capital gains. When the venture capital/private equity/hedge fund sets up a carried interest to allocate some (usually 20%) of the profits from the limited partners to the general partner, in compensation for the latter's efforts in organizing the partnership and creating those (hopefully) above-market profits, letting the general partner pay only capital gains rates on those profits eligible for that rate doesn't result in less tax being paid than if the partnership had no carried interest. The proposed change is simply class envy and demagoguery, and you should not fall for it. Besides, the easy work-around would be to require the limited partner investors to make low-interest loans to the general partner, who would use the loan proceeds to fund a true (non-carried) capital interest that couldn't be characterized as ordinary income. Hence, the proposed change would yield minimal or no net new taxes.
Reply to this commentLinkReport AbuseA good point. To simplify even further, the partnership over the course of a (hopefully) successful life, will have both ordinary income and capital gains. That Hedge fund managers take their compensation in capital gains is simply a choice between the investors/interested parties in the partnership. Change the rules and the various interests will just recalibrate what is shared between them. Net, the government gets not one dime more in taxes, unless it artificially (politically) changes capital gains into ordinary income, which would be unjust, unfair, and not a nice thing to do.
Reply to this commentLinkReport AbuseIf everyone is looking for more tax revenue how about the 50% or so of people who pay no taxes start paying their Obama fair share.
Reply to this commentLinkReport AbuseWould you like to be in the financial situation that those that don't pay income tax are in?
Do you complain about how Bank of america can go without paying any taxes either? or is your criticism designated only to those who are the worst off in the country?
Reagan raised taxes at least 10 times as governor and president. It's time the GOP remembered Reagans true legacy and NOT just the cherry picked one.
Reply to this commentLinkReport AbuseFour legs good, two legs bad.....
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