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Loophole, or Lifeline?

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.



  1. hieronymus wrote:

    it’s just like screaming for tort reform all of the time. The GOP has plenty of broken records in their library.

    Tuesday, November 27, 2012 at 2:52 am | Permalink
  2. Arthanyel wrote:

    There is some discussion of the idea that Mitt ROmney floated (his one good idea) of capping deductions rather than eliminating them. So, for example, everyone could specify up to $50,000 in deductions. Obviously very, very few middle class people have that many deductions. And those that are close still get 50K, so they are minimally impacted.

    Of course as you point out this doesn’t come CLOSE to raising the $160B per year the President wants. It would raise (best estimate I have seen) about $35B. But its a start.

    At this point, I see only two likely outcomes:

    1) Democrats hold firm, and we step off the “cliff” to find out its more like a curb. Then they push the Republicans to immediately enact the middle class tax cuts they have ALREADY passed in the Senate, and we spend the rest of the year fighting over exactly what spending actually gets cut.

    2) Republicans realize their attachment to tax cuts on the rich is killing them and their leverage is non-existent after January 1, so they agree to a balanced “grand bargain” which will have about 1.2T in revenues (120B per year, majorly from deduction capping, capital gains and carried interest tax break elimination, and a smaller rise in rates than they would get by waiting) and use that leverage to make Obama commit to reducing the overall costs on Medicare/Medicaid. Somehow.

    We’ll see.

    Tuesday, November 27, 2012 at 3:05 am | Permalink
  3. hieronymus wrote:

    The ironic thing is that these are the same lawmakers that wrote the automatic cuts into law in the first place. Now they’re screaming murder.

    Thank the “super committee” for not coming to a deal. Thank the GOP for having a sudden fit about raising the debt ceiling. Thank Bush II for giving the country’s budget surpluses to the rich and the pentagon. The 2000 election will go down in history as a watershed moment, unless Texas is still writing the history books fifty years from now.

    Tuesday, November 27, 2012 at 5:12 am | Permalink
  4. ebdoug wrote:

    Romney said in the debates that he wanted to cap the deductions (which would include the personal exemption) at 25K. Then take a straight 20% of the remainder of the income. Remember with Romney’s tax dodges, he only paid out 14% of his income. I think in 2011 he made13 million so he’d be paying 2.6 million instead of 1.8 in 2011 which would be slightly less than a 50% increase. On the other hand a family of four with two under 17 age children making 50K paid $964 in Federal Tax under Romney. With his plan, they would take away 25K and pay tax of 20% on the other 25K or $5000=or a 418% increase. That is what Romney said in the debates. No one mentioned it during the election.

    Tuesday, November 27, 2012 at 7:48 am | Permalink
  5. Michael wrote:

    Arthanyel, I think you’re neglecting one other likely scenario: The Dems cave, as they have repeatedly done. Any time in the past decade that the Dems have really pushed hard (e.g., Bush’s psychotic/crony judicial appointments, single payer option), they’ve backed down in the face of GOP obstruction. The Dems, in my view, really want to be perceived as the sane, reasonable option. However, you can’t reason with a psychopath.

    Ebdoug, the numbers you cite regarding the family of four don’t add up. The cap is on *deductions*, not income eligible for deductions. There’s no way a family with an income of $50K would have anywhere near $25K in deductions. They would have $2K for the kids ($1K each), whatever they pay for health insurance (mine is $2400 for a family of 4), 401K investment (10% would be $5K), plus their mortgage interest ($500/month would come to $6K). With all of that, they’re only at $15K. They would not be affected at all by the deduction cap.

    Tuesday, November 27, 2012 at 10:07 am | Permalink
  6. TJ wrote:

    Michael, I think the difference in EBDOUG’s example is that 20% is actually a large tax INCREASE for people making $50K. They are currently paying 10% on the first $17,400 and 15% on everything after that after deductions. I’m not sure where he got $964, that seems too low but it’s surely much less than $5000 or 20% of $25,000 — which as you pointed out is actually a low estimate because they probably wouldn’t have $25K in deductions.

    Tuesday, November 27, 2012 at 10:35 am | Permalink
  7. Arthanyel wrote:

    Michael: I honestly do not believe that the Demopcrats just caving is a likely outcome. A possible one – yes. Likely? No. Especially since they don’t have to – all they need to do is not agree, and all the tax cuts expire anyway. And I agree you can’t reason with a psychopath, but there have been quite a few glimmers over the last couple of weeks that the sane parts of the GOP are starting to pull away from the bat shit crazy parts for this discussion.

    The Republicans have little (if any) leverage because all the Dems have to do is wait and they get exactly what they want.

    Tuesday, November 27, 2012 at 11:11 am | Permalink
  8. Duckman wrote:

    I find this loophole stuff borderline hilarious. Shouldn’t we be closing loopholes regardless of the debt and economy?

    Tuesday, November 27, 2012 at 4:14 pm | Permalink
  9. Iron Knee wrote:

    Duckman, it depends. Is the mortgage interest deduction something we want to close?

    Personally, I hate the mortgage interest deduction, because it causes housing prices to rise artificially. But housing is a long term thing, and since we’ve had the mortgage interest deduction for a very long time, there is no easy way to get rid of it without causing a lot of economic problems and making a huge number of (relatively powerful) people very unhappy. So it is not only politically difficult to get rid of it, it might not even be a good idea now to do so.

    Tuesday, November 27, 2012 at 6:33 pm | Permalink
  10. Michael wrote:

    TJ, yes, it is well known that a flat income tax rate ends up creating a regressive structure when all is said and done. But Ebdoug’s numbers still don’t add up, and I now see why: Romney did not propose a flat tax rate of 20%. Instead, Romney proposed to >cut all tax rates by 20%. (It wouldn’t work, but that’s beside the point.) So, if we took Romney’s proposal at face value and assumed it would actually work, the family would not see an increase.

    Arthanyel, frankly, I’m not sure what is likely to happen. While I don’t think the sky is falling, I do not share your view that the fiscal cliff will just be a curb. And there are plenty of progressive economists that feel the same. For instance, Wonk Blog has a nice summary of what is involved and at stake, and going over does seem almost certain to send us back into recession. So I don’t think Dems are very cozy with the idea of going over.

    IK, I’m with you on the mortgage interest deduction. I’ve seen analyses that suggest it is actually inverse welfare, where the poor (by renting and paying taxes…thus no deduction) subsidize the rich (who pay a lot of interest on very large houses).

    Tuesday, November 27, 2012 at 9:30 pm | Permalink
  11. Iron Knee wrote:

    Almost all deductions are inverse welfare, but the home interest deduction is an especially bad one, since it only benefits people rich enough to own homes.

    And it doesn’t do what it was supposed to do (make it easier for people to buy homes) since housing prices go up to compensate for the deduction, so the only people who actually benefit are realtors (since their commission is calculated on an inflated price) and banks (who get the inflated interest).

    If they had really wanted to make it easier to own homes, they should have built lots and lots of them! They did something similar when they were trying to settle the west, giving land away free to homesteaders who agreed to live on the free land for at least 4 years. And it worked! They could have done something similar to that to encourage home ownership.

    Tuesday, November 27, 2012 at 10:24 pm | Permalink
  12. TJ wrote:

    Yeah, but as you said earlier, how do you take it away now? Unless you’re going to forgive people’s loans for the value that their home drops (further), you’re just putting people in trouble even more in trouble.

    Wednesday, November 28, 2012 at 12:09 am | Permalink
  13. ebdoug wrote:

    Michael and TJ, I got the deduction from running a family of four with 50K income through the IRS tax program as I do taxes. The standard deduction plus 4 people, two under 17 came to 24K plus the the 2K credit for two children. Then as TJ pointed out, the tax rate schedule only taxes the first part over 24K at 10%. I didn’t figure it, the tax program figured the $964. I got up the morning after the debate and ran the figures through the tax program. When I heard 20%, was shocked. No, they wouldn’t have 25K deductions, but standard deduction and personal exemption add up to that. They aren’t quite in the 47% at 50K but don’t give up much to the IRS.

    Wednesday, November 28, 2012 at 10:52 am | Permalink
  14. Iron Knee wrote:

    TJ, like I said, I’m not sure how to take away the home mortgage interest deduction without damaging the economy.

    Maybe Romney’s proposal to cap it, while not going far enough to do much good, is the best we can hope for. And make the cap in fixed dollars (not indexed for inflation) so it will (slowly) apply to more people over time.

    I’m just thinking out loud here.

    Wednesday, November 28, 2012 at 10:56 am | Permalink
  15. Don wrote:

    Seems like there are some “easy” changes that could be made such as capping the total interest that could be deducted, say $20,000 for arguments sake. This will protect the deduction for lower earning folks.

    Second adjustment would be to allow interest deductions on only one home. A second home is clearly a luxury in my mind. It was also a surprise to me to learn that if one buys a trailer or other RV that the interest on the loan is treated as mortgage interest on a second home. I believe the same occurs on a boat, as well, if it has sleeping accommodations.

    Wednesday, November 28, 2012 at 3:54 pm | Permalink
  16. ebdoug wrote:

    Already a huge tax cap on deductions depending on your income, the wealthy. Regan put that in to “Raise taxes”, Bush administration rolled it back. I was horrified when I saw the limit on exemptions and deductions was rolled back to protect the wealth of the wealthy. No one cared.
    No one cared when social security started being taxed. You pay tax on the 7.5% you pay in (not right now, that has been given a temporary reprieve.) The self-employed was paying tax on the part above 7.5% going in, then paying up to 85% on social security when it came out. So it is double taxation as are a lot of things double taxed, like paying sales tax, then paying Federal and state tax on the money you paid in sales tax.

    Thursday, November 29, 2012 at 7:47 am | Permalink
  17. Arthanyel wrote:

    FYI I think I see what is really happening in Washington. Republicans know they will have to raise taxes on the rich, they know that their Teapublican base and Grover Norquist will eviscerate them if they do, so they are going to force us over the cliff. That way the tax rates go up automatically – they didn’t vote for it. And then they can pass the Senate bill immediately as “the best they can get” while they negotiate the rest of the issues and claim they will “get tax cuts for the job creators” back in. Then when they fail to do that, again they won’t be voting for tax increases.

    *straps on parachute and skies for going over the cliff*

    Friday, November 30, 2012 at 11:45 am | Permalink
  18. The home mortgage interest deduction is politically untouchable. The only way to address that item is for bipartisan agreement to be reached to phase it out over time. In the UK, this was done starting in the mid-80’s, since the conclusion was that the deduction was distorting the housing market by encouraging people to buy more house than they could really afford or need. I believe that the deduction has now been completely eliminated in the UK.
    The good news is that the Democrats do not have to do anything. I would like to see them, however, doing a better job of pointing out the bipartisan nature of the Fiscal Cliff mess. The GOP’s hands are all over the rules that will be implemented in January if nothing is done.

    Friday, November 30, 2012 at 2:22 pm | Permalink

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  1. Political Irony › Over the Cliff on Saturday, December 1, 2012 at 3:35 pm

    […] After all, didn’t major Republicans already offer to compromise by raising revenues? No, not really. Their offer to raise revenues does not include any tax increase, only “closing of tax […]