Loopholes, People Who Love Loopholes

Over the years, various special interest groups have managed to build a labyrinth of tax credits and deductions, some direct subsidies (such as the infamous farm support payments), that add up to a staggering estimated loss of governmental revenue on the order of magnitude of $1 trillion a year. Using such tax and subsidy structures, Congress has encouraged everything from home ownership (the home mortgage deduction, although capped) to managers working for upside in hedge funds and private equity (where, without the requirement of investing a dime, their earnings are taxed at capital gains rates… about half of the federal rate they would have to pay if they had a sales commission job in some other industry). If we collected that $1 trillion, our annual deficit would almost disappear (the deficit is currently project to hit $1.2 trillion this year).

We have the highest corporate tax rates in the world (we used to be among the lowest), with a loophole that drops what most multinationals pay – if they pay anything at all – to one of the lowest effective tax collection percentages on earth. Our laws effectively cause such cross-border companies to keep their money overseas, to hire workers overseas, rather than repatriate that money to the U.S. and face crushing 35% federal corporate tax rates. If we were to declare a six month moratorium for companies to repatriate to the U.S. that money at 20% and then permanently reduce the corporate rate to 25% but tax global earnings, we could generate hundreds of billions of lost revenue.

Our impasse-oriented do-nothing Congress has pledged to address many of these loopholes, but the process is one of “eliminate all the loopholes that don’t benefit my state/Congressional district, but I ain’t gonna give those up.” Here’s how the process works: “As a member of the ‘Gang of Six,’ Senator Mike Crapo of Idaho has emerged as something of a hero among advocates of bipartisanship, one of three conservative Republicans working with three Democrats to cut the deficit by closing loopholes that allow businesses and households to avoid paying taxes.

“Yet earlier this year, the senator made sure that a $3 billion loophole — protecting ‘black liquor,’ an alcoholic sludge used as fuel in timber mills and factories — remained open in the negotiations over the highway bill that President Obama signed this month. Many budget experts criticize the loophole as a tax dodge because it allows the sludge to qualify for an energy subsidy created to wean the country off imported oil for vehicles, which black liquor does not do.” New York Times, July 20^th. This isn’t a Republican or a Democratic habit, it’s just the way congress has worked for a very, very, long time. It is extraordinarily difficult to change such deeply embedded habits. Whether it comes from the hidden (??) message in campaign contributions or the simple fear of losing local voters, our elected representatives practice NIMBY politics.

On a national level, there also seem to be some sacred cows that have little to fear from significant Congressional cuts: “[T]he three largest are as popular as they are expensive: the mortgage interest deduction has cost about $75 billion a year recently, the employer deduction for health care has cost $120 billion a year, and the charitable-giving deduction has cost $38 billion a year, according to the bipartisan Joint Committee on Taxation.” NY Times. With the housing market in the toilet, healthcare hitting new levels of price increases and charities find their coffers seriously reduced by the recession, it is extremely unlikely that these loopholes are in any danger of elimination. In the end, something has got to give, and even if we phase most of these loopholes out over time, we need to address the underlying policies to live within our means while still investing in our future growth.

I’m Peter Dekom, and hypocritical commitments to closing loopholes leave this country desperately short of solutions on budget deficit reductions.