Archived: So What’s Wrong With Closing Tax Loopholes?


As timid pols,
Define their stance;
Tax reform,
Has little chance.

Does there exist today any unit of American government that is not suffering financial stress? From poor bankrupt Vallejo, Calif., to all 50 sovereign states, to the federal government its very self, everyone is in the red. There are no bailouts for any of them, and only the feds can print cash to pay their own bills.

In the face of such a crisis, there are two obvious solutions. One is to cut services; the second, to raise taxes. The first is easier. Cutting implies injuring the poor among us. This might mean snipping school lunches, health care subsidies, library hours, legal assistance programs, community college courses, or neighborhood police patrols. All such cuts are painful and few of the victims can afford spiffy lobbyists to fight them off.

Tax increases are different. Most proposals would not be painful at all – they would merely close loopholes – but they’d affect people well fixed with those spiffy lobbyists. Take the corporate scam of officially relocating one’s headquarters abroad…say to the Cayman Islands or Bermuda. This gimmick often involves little more than a postal box, but it allows corporate profits to be taxed at the special low rates that those countries have artfully set up. This wrinkle generates huge losses for the U.S. Treasury. Is there any good reason not to end it?

Or what about the sales tax? By ordering your blouse online, you avoid paying that extra percentage as opposed to buying at your local emporium. That’s not only bad for the emporium that has to face this unfair competition, but also for Main Street, which may lose another store. And of course, it’s very bad for the state that loses the tax revenue. Constructing a computer program to make all local rates available online to mail order merchants would be child’s play today. It’s just politics that keeps such sales exempt.

Then there is the famous capital gains tax. Is there some good reason why it is so much lower than the regular income tax? Well, yes, a very good reason. The prosperous folks who can utilize capital gains have plenty of money for lobbyists and political donations. Thus hedge fund owners today still manage to pay Uncle Sam at a mere 15 percent on their investment income rather than what you and I pay. The same goes for an investor who makes his bundle on oil, condos, or pork bellies. He also pays only 15 percent.

And worse, if Uncle Leon dies with a bunch of appreciated assets, there is no tax at all on that increased value from the time he bought them. They go to his heirs free.

Good old Britain has also come up with a great idea that would help us out. It charges a tiny transaction fee – a quarter of one percent – on the sale of securities. The government makes a tidy sum off it and the whole concept seems congruent with America’s commonly imposed taxes on the sale of goods and services. Some states similarly tax real estate sales. But since Wall Street owns so much of our government, a revenue raiser like this would be a toughie to pass.

There also remain on the books plenty of old special deals for oil companies, mining companies, investment companies and other fat cat beneficiaries that could be repealed to help us squirm out of our current financial trap. Unfortunately, there are plenty of Democratic lawmakers as well as Republicans who have comfy relationships with these outfits.

Further, one of the biggest impediments to tax reform is the press. Reporters, editors, and commentators alike seem perfectly content to refer to any attempt to close an egregious loophole as a “tax increase.” This terminology stems from Republican spokesmen, lobbyists, and the owners and advertisers of the press itself, all of whom panic at the thought of losing their special deals. So the chances of serious loophole closure seem slim, especially as our new president retreats further each day from his promises of “change.”

Columnist William A. Collins is a former state representative and a former mayor of Norwalk, Connecticut.

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