(Bloomberg View) — There’s an easy way to sum up virtually any debate about tax policy: “You call them loopholes. I call them deductions.”
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Paying for new spending by “closing the loopholes” is a favorite rallying cry of almost everyone. But rarely are those people picturing giving up their own deductions for mortgage interest, employer-sponsored health insurance, dependent children, or retirement accounts. Why, no! Those aren’t loopholes. Those are just the basics of a decent middle-class life. Loopholes are the deductions used by other, richer people who can afford crooked lawyers.
The sad fact is, however, that almost all of the money lost to “tax expenditures” goes to you, Mr. or Ms. Middle American. It cannot be otherwise; you have most of the money. Oh, I know it doesn’t feel like you have most of the money. Didn’t you just read an article saying that the top 1 percent of Americans collect around 20 percent of national income?
Why, yes, you did. But that means the bottom 99 percent have 80 percent of national income. If we confiscated every dollar the top 1 percent made, that still wouldn’t quite cover our national expenditures. And it is not actually practical to take all of it, since the normal response to 100 percent tax rates would be to move or to stop making money.
Because you have most of the money, you collect most of the tax breaks. On an individual level, of course, a very rich person gets much more out of our national tax expenditures than an accounts payable manager in Toledo. But collectively, the vast middle is where most of the money goes.
Here is a complete list, with one exception, of all of biggest tax expenditures in 2015.
Cost (in millions)
|Exclusion of employer contributions for insurance||206,430|
|Special tax rate for capital gains||85,360|
|Mortgage interest deduction||69,480|
|Defined-contribution employer pension plans||68,040|
|Deferral of income from controlled foreign corporations||64,560|
|Step up basis of capital gains on death||63,440|
|Deductibility of local taxes||47,490|
|Defined benefit employer pensions||44,640|
|Deductibility of charitable contributions||44,280|
|Partial tax exemption of Social Security benefits||39780|
|Capital gains exclusion on home sales||36,930|
|Deduction for property taxes||33,120|
|Tax free state and local bonds||31,070|
|Special tax rate for qualified dividends||26,320|
|Self-employed retirement plans||25,480|
|Child Tax Credit||23,900|
|American Opportunity Tax Credit||15,660|
|Deduction for U.S. production activities||14,500|
|Tax-free allowances and benefits for armed forces personnel||13,570|
|Tax-free interest from life insurance savings||13,100|
|Tax-free workers’ compensation benefits||9,990|
|(Source: Office of Management and Budget )|
Note what is not on that list: things like “carried interest,” “corporate jets,” or tax breaks for oil and gas companies. Those are favorite talking points because they sound bad, but they are dwarfed by something like employer-sponsored health and pension benefits.
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To be sure, many of these things, like 401(k)s, mortgage interest deductions and self-employed retirement plans disproportionately benefit the affluent, but we’re talking about the merely moderately prosperous, not the Scrooge McDucks rolling around in their piles of filthy lucre. If you’re reading this article, it’s quite likely that you’re taking advantage of many of these loopholes, without any help from shady lawyers.
If you want to pay for any major new program by “closing the loopholes,” it is these loopholes that you will need to close, because the amount of revenue raised by, say, doing away with carried interest treatment of sweat equity partnership stakes works out to a rounding error on the federal budget.
You can make a sound economic argument that we should do away with all these tax expenditures, hopefully in the context of a tax reform that lowers tax brackets to make the change “revenue neutral” — which is to say that after both changes, we should be raising about as much money as we did before. But “revenue neutral” does not mean “no one gets hurt.” My household, with its dainty mortgage, minimal capital gains, and lack of children or tax-free municipal bonds, would come out greatly ahead in such a reform. Other people, perhaps who have generous health and pension benefits and a heavily mortgaged house to shelter their four children, would be badly pinched.