In Defense of Tax Loopholes (Part 1)

We’re broke, we spend too much money, and no one in Washington is willing to shred the government credit card. The debt ceiling extension was the equivalent of you realizing your credit card debt is overwhelming, getting a new card with an introductory rate of 0% for the first 6 months, transferring your balances, and then going on a spending spree with the new card because you felt so good about “getting rid of” that debt hanging over your head.  The politicians in Washington make Becky Bloomwood, the credit card statement-hiding heroine of Sophie Kinsella’s Shopoholic series, look responsible.  Washington’s answer to our debt and overspending problems?  More taxes.  If they only had a little more of your money, they could cure cancer, make every child an “A” student and create a utopian society where no one ever went hungry, went homeless, or had to face the indignity or being called “gay” or “retarded”.  But even the most liberal of Democrats knows that raising taxes during a depression recession is stupid. So politicians have to figure out how to get more money from you without you noticing. Enter the newest stratagem: closing tax loopholes.

Loopholes in the tax code allows you to either: a) reduce the taxes you owe (tax credit), or b) reduce your taxable income (income deduction).

According to Forbes.com*, these are the 10 loopholes projected to have the highest fiscal impact for 2010-2014:

These items aren’t exclusive to multimillionaires.  They’re available to almost any productive member of society.

For any basic task that a sentient human being should be able to perform – feeding herself, finding a job, taking her kids to the doctor – there’s a taxpayer-funded government program to do it if you can’t be bothered to. These programs are obviously popular among their beneficiaries – why pay for something if you don’t have to? – but no one in Washington seems to remember that the money to bankroll these programs comes from the toil of other people. Even if these programs were originally intended as temporary fixes, they’re anything but. The more people there are who are aware that they can get necessities courtesy of their fellow Americans, the more people will. Which means these programs require greater budgets every year. It never ends.

Take item #2 above, the mortgage interest deduction:

When you can deduct your mortgage interest payments from your taxable income, you’re more likely to afford a home, and more likely to exercise the care and diligence that comes with owning private property. With the deduction, politicians argue that they’ll receive less revenue. Revenue that will be used to subsidize public housing programs, such as Section 8.

Every neighborhood, city and state is better off with homeowners instead of renters, especially renters whom the government forces taxpayers to subsidize. Yes, when homeowners can deduct mortgage interest from their taxable income, that lowers tax revenue in the short term. But it increases property values, and thus property taxes. And it encourages stable homeowners who have a stake in their community.

We can make the same analysis with charitable deductions:

 In FY 2012, your elected representatives have budgeted $598 billion of your money for food stamps, unemployment compensation, child nutrition and tax credits, and supplemental social security for the disabled. These programs are rife with fraud. Even when the benefits are legitimate, the government’s definition of disabled can be pretty inclusive  Do you want to pay higher taxes to support someone who’s on disability because of a reckless personal choice? Although Social Security’s Supplemental Security Income program is almost insolvent, the ranks of the disabled grow.  We should be able to choose which programs to support, and get a tax deduction for doing so.  If you feel passionately about Head Start, you should be able to direct your financial support to it.  Can’t imagine a world without NPR? Send them a check.  Or, maybe even just support your own family so that they’re not a drain on the taxpayers.  If every organization getting government money was forced to answer to you and me before we’d pay the bills, fraud would decrease and accountability rise.  Choice is a good thing in ice cream, schools and charitable services.

The Earned Income Credit is a welfare program in disguise. It should be terminated:

From Gateway Pundit:

A married couple with three children and $40,000 in income can take a $9,700 standard deduction and $15,500 in personal exemptions, bringing their taxable income down to $14,800. They would owe $1,505 in taxes.
But with three children, they would get $3,000 in child credits, leaving them with no taxes owed – and a $1,495 refund check.

You just gave Mr. & Mrs. Freeloader $1,495 (via the government) for breathing.  The rationale for the EIC is to offset the Social Security and Medicare taxes the government deducted from Mr. & Mrs. F’s paychecks and didn’t refund to them.  However, Mr. & Mrs. F will still receive Social Security and Medicare benefits when they retire.

Did everyone serving in Congress go to public school?

The best thing to do would be to destroy our current tax code and replace it with a flat or fair tax.  Barring that, here’s what I’d change:

Let people deduct their health insurance premia.  Separating health care insurance from employment will increase competition in the health insurance market, and give people with pre-existing conditions  control of their insurance instead of leaving them at the mercy of their employers.  I’d also loosen the regulatory schemes, letting health insurers sell policies across state lines. That would open up the market to more companies, which would offer more policies.

Eliminate the passive loss rule.  Passed in 1986, this rule forbids you from deducting more than $25,000** in investment real estate losses per year, unless you’re an active real estate agent.  You do get to accumulate your losses and apply them to any gain when you ultimately sell the property, but offsetting ordinary income with real estate losses would benefit many real estate investors right now.  It would also entice new investors, which would help the economy.

*Who, in turn, dug the numbers out of here: Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 written by the staff of the joint committee on Taxation.

**Up to $100,000 of adjusted gross income . This deduction is gradually phased out for taxpayers with adjusted gross incomes from $100,001-$150,000.

**This article is featured in the Tax Carnival #91-Taxtoberfest 2011**

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