Don’t Close the Tax “Loopholes”

By: Laurence M. Vance

Why do some conservatives and libertarians want some Americans to pay more in taxes?

Oh, they don’t actually come out and say that. Then they would sound like Bernie Sanders or Hillary Clinton. 

What they do say is that certain tax deductions are “loopholes” that need to be “closed” because they “distort” the tax code, “subsidize” high-income taxpayers, and encourage people to make “economically unwise decisions.” Although most of them also add that the increased government revenue that would result from the elimination of a particular deduction should be used to “pay” for “good tax reform” by “offsetting” the “cost” of lowering tax rates and making the tax code “simpler” and “fairer,” there is no getting around the fact that some conservatives and libertarians still want certain Americans to pay more in taxes.

The latest deduction under attack is the State and Local Tax Deduction (the SALT deduction).

RELATED: “Hey GOP, Want to Cut the Burden of Government? Cut Spending” by Ryan McMaken 

Let me first explain how tax deductions work and how eliminating them, reducing their value, or phasing them out above a particular income level is no different from raising tax rates.

Tax deductions serve to reduce one’s income subject to tax. Taxpayers will pay less in taxes the greater the number, and the higher the amount, of deductions they qualify for. All taxpayers can generally claim a standard deduction of $6,350 ($12,700 for married filing jointly). Many taxpayers can also claim deductions for educator expenses, business expenses of performing artists, health savings account contributions, alimony paid, moving expenses, the deductible part of self-employment tax paid, health insurance premiums paid by the self-employed, IRA contributions, tuition and fees paid, and student loan interest. Instead of taking the standard deduction, some taxpayers can itemize their deductions and end up with a larger total tax deduction. In this case, allowable deductions include medical and dental expenses, state and local taxes paid, real estate taxes paid, home mortgage interest, mortgage insurance premiums, charitable contributions, casualty or theft losses, unreimbursed employee expenses, and tax preparation fees. 

All applicable deductions (and exemptions, which work the same way) are subtracted from one’s gross income and then one’s income tax due is calculated. Thank God for tax deductions. If someone makes 100K and has 20K of deductions, then he is only taxed on 80K. This results in the taxpayer being able to keep thousands of dollars of his money in his wallet or bank account. He may then spend or save as he sees fit instead of paying the money to the federal government to waste it on foreign wars, fund some boondoggle, or redistribute some of it to other Americans after it first pays the fat salaries of government bureaucrats. Every dollar held by Americans in their own hands and kept out of the greedy hands of Uncle Sam is always a good thing. It doesn’t matter how many tax deductions there are, whom they benefit, what their amounts are, why they are enacted, how long they have been in place, who supports or doesn’t support them, or how much they “clutter up” the tax code.

The current tax brackets are 10, 15, 25, 28, 33, 35, and 39.6 percent. Any increase these numbers means that some Americans will get a tax increase. Any decrease in the income level at which these rates apply means that some Americans will get a tax increase. Likewise, any tax deduction that is eliminated, reduced, or phased out means that some Americans will get a tax increase. So the effect is the same: a higher tax bill. In the end, it makes no difference whether one pays more in taxes because the rates increase or the deductions decrease. It makes no difference whether one’s net income is taxed at a higher rate or one’s net income is increased and then taxed at the prevailing rate. The result is still a higher tax bill.

Conservatives and libertarians would scream bloody murder if the tax rates were increased. Yet, some of them are quite adamant that certain deductions should be eliminated even though it will accomplish the very same thing: increase some Americans’ taxes.

But what if the elimination of a particular tax deduction is tied to a decrease in tax rates, broader tax brackets, and/or an increase in the personal exemption or standard deduction?

If all tax deductions were eliminated and every American had to pay a flat rate of, say, 5 percent, then that would be a tax plan I could support. Not because I believe the government is entitled to 5 percent of every American’s income, but because it is demonstrably better than the current system.

But this is not the kind of tax reform that is even being considered by the Republicans in Congress. Republicans (just like Democrats) are committed to the principle of revenue neutrality; that is, any revenue loss from tax cuts must be offset by revenue gains either from tax increases, broadening the tax base, closing loopholes, or eliminating deductions. Republican ideas of tax reform merely rearrange the deck chairs on the Titanic. Although some Americans will pay more in taxes and others will pay less, the government will ultimately extract the same amount of money from all Americans as it did before — an obscene amount of money of which only a miniscule amount will be spent on things that could be considered constitutional.

Libertarians of all people should be saying that no one’s taxes should be increased and that everyone’s taxes should be decreased. Accordingly, the elimination of a tax deduction shouldn’t be tolerated any more than an increase in a tax rate.

And why are some conservatives and libertarians so focused on the SALT deduction in particular? Why don’t I hear them saying that child credits should be eliminated because it isn’t “fair” for Americans without children to “subsidize” Americans with children?

I wish that conservatives and libertarians who are so adamant about tax deductions being eliminated would expend the same amount of energy making the case for drastically lower tax rates, a less progressive tax system, the elimination of refundable tax credits (a form of welfare), and massive cuts in government spending.

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