Republicans now say that they are willing to “compromise” by raising revenue in addition to cutting services, but they want to raise revenue by closing tax loopholes rather than raising tax rates. This is a hypocritical smokescreen rather than an honest proposal.
Politico has an interesting article “Tax loopholes alone can’t solve fiscal cliff“, which lists the top ten loopholes in terms of how much they cost the government in lost revenue. Let’s look at just the top five:
Heading the list at number one is the exclusion for employer-sponsored health insurance, which costs the government $164 billion. If we eliminate that, then employees would have to start paying taxes on what their employers pay to provide health insurance. Needless to say, closing that “loophole” would cost the middle class far more than the rich. Yes, once again the GOP would be protecting the 1% at the expense of the middle class.
Number two is the exclusion for employer pension benefits (cost: $162 billion). Employees would have to pay taxes up front on their 401K plans, which means they are going to have far less money to retire on (unless they are rich and aren’t depending on a pension).
Number three is the home mortgage deduction (cost $100 billion). I don’t care how many houses John McCain or Mitt Romney own. Even if they have mortgages on all those homes (and I doubt they do), this will take a much bigger percentage chunk out of middle class homeowners’ income. If this were eliminated, how many people could no longer afford their mortgage payments and would lose their homes? Not to mention that housing prices would plummet.
Number four is the exclusion of Medicare benefits (cost: $76 billion). Yeah right, let’s make seniors with medical problems pay off our deficit. Just how are they going to pay those taxes? With their pensions? Think about it. If you’re on Medicare and need an expensive operation to save your life, even if all your medical costs are completely paid for, you’d have to pay income taxes on what Medicare paid to cover those costs.
Number five in Politico’s list is interesting. It is the loophole that taxes capital gains at a lower rate then ordinary income (cost: $71 billion). Naturally, Republicans don’t see this as a loophole (even though that is how it is accounted for by the government). They see it as a tax rate, and have already said they won’t support raising the rate. Unsurprisingly, it is the biggest loophole whose elimination would cost the rich any significant amount of money. Even more ironically, it is the only loophole in the list that has ever been eliminated (and by Ronald Reagan of all people).
All of these supposed “loopholes” are extremely popular. Can you imagine any Congressperson (from either party) ever proposing that we eliminate the home mortgage interest deduction? The powerful realtor lobby would go nuts!
And yet, eliminating all of the top 10 loopholes wouldn’t even get us half way to generating the revenue we need. It would be almost impossible to close enough loopholes to balance the budget. It’s that little thing called “mathematics” again. What is the chance that Congress will eliminate any of the top ten loopholes, let alone all of them? You guessed it.
So the next time anyone says we should raise revenue by closing loopholes, ask them what loopholes they want to close.