Americans brave (or crazy) enough to do their own taxes this year face 13 hours on average sweating their Form 1040, according to the IRS. And so, with April 15 bearing down, I spent a recent subway commute perusing the Center for American Progress’s report on “Hidden Spending in the Tax Code.” (I live life on the edge.) Actually, the report by the liberal think tank should interest anyone dreading the annual migraine of taxpaying.
It documents the breaks for wealthy people larding the tax code. Plugging these and other unjustified loopholes would save taxpayers a fortune, make the code fairer, and make it simpler — a move toward the day when you could spare yourself the equivalent of almost two work days with a calculator, or skip the trip to H&R Block.
“[Congress] has not even begun to tackle the vast array of tax breaks that disproportionately benefit upper-income Americans, nor has it addressed the many loopholes enjoyed by large corporations,” the report says. Enacting its recommendations would save taxpayers $1 trillion (yes, with a t) over 10 years — and that “by no means comes from an exhaustive list.” It is this termite’s nest of exceptions and breaks that infest the tax code with unfathomable complexity, stretching it and related regulations over thousands of pages.
The tax code should be a tool for raising revenue, not social engineering.
Some conservatives bizarrely frown on loophole-closing as a tax hike. But once upon a time, it was conservative dogma to simplify the tax laws. After flirting with a flat tax, Ronald Reagan signed epic reform in 1986 that ended numerous breaks and left two tax rates. Reagan relied on sound rationales: The tax code should be a tool for raising revenue, not social engineering. The latter you can do more efficiently and honestly by spending money on a problem directly, rather than sneaking a break into a tax code that’s cluttered with them.
The 1986 reform recognized that tax breaks are a backdoor form of spending, which Reagan had pledged to cut. (Economists call these breaks “tax expenditures.”) It lowered rates without enlarging the deficit, thanks to those closed loopholes. It removed distortions from the economy, forcing business people to make business decisions based on the market, not a tax handout. It made tax preparation easier. Liberals applauded Reagan’s reform, too. By making personal exemptions more generous, the new law ended income taxation for millions of poorer Americans. Moreover, billions worth of those discarded tax breaks had benefited the affluent and corporations. That’s why Democrat Jerry Brown out-Reaganed Reagan and supported a flat-out flat tax in his 1992 presidential campaign, while The New York Times endorsed a different version.
And that’s where the Center for American Progress picks up the baton.
We’ve backpedaled, you see, from the ‘86 reform and ladled loopholes into law again. The ones the center targets for elimination include: full tax deductibility for the wealthiest Americans of things like mortgage interest; estate tax dodges that undervalue assets or create tax-free trusts; the infamous “carried interest” loophole that lets investment fund managers list their compensation as lower-taxed capital gains, rather than regular income; “S corporations,” which allow certain professionals to duck taxes; and allowing the mortgage interest deduction on second homes and yachts (yes, that luxury cruiser counts as a second home).
A flat tax with a low rate, or a graduated tax with a couple of low rates that exempted the poor and scrapped most deductions and credits, would be an improvement over our current mess.
This list doesn’t include other schemes that ought to be shut down. To cite just one, there’s a strong case for at least capping the mortgage tax deduction on first homes; if someone wants a McMansion, they should pay for it without the taxpayers’ help. Our jones for making everyone a homeowner, genesis of the mortgage deduction, ignores how the recent financial crisis exposed the folly of pushing homes on those who can’t afford them. It also ignores that a country can prosper without lots of homeowners: witness Switzerland and Germany, where most people rent. A flat tax with a low rate, or a graduated tax with a couple of low rates that exempted the poor and scrapped most deductions and credits, would be an improvement over our current mess.
As for the objection that closing loopholes means raising taxes, it ignores the loopholes=wasteful spending equation. It also overlooks anti-tax zealots’ lousy track record forecasting tax effects. They predicted recession from Bill Clinton’s tax increases. Instead, we got the longest boom in our history. They promised nirvana from George W. Bush’s tax cuts, which preceded some of our most anemic postwar economic growth.
Remember too that if corporations and the wealthy can’t survive without a taxpayer handout, the whole notion of free enterprise is all wet. Either you’re a capitalist or you’re not.
This program aired on April 5, 2013. The audio for this program is not available.