Sunday, September 09, 2012


Much of the rhetoric this campaign circles around tax "loopholes" for the rich. Rarely in a speech is it actually said what these "loopholes" are. Most of the people in the audience don't know jack about taxes other than they copy down numbers from a W2 onto a 1040 and add, subtract, multiply and divide where the form tells them. They don't know a loophole from a posthole; the term "loophole" is often being used for the sole effect of implying that there is illegal activity going on.

Wikipedia describes a loophole as "an ambiguity in a system, such as a law or security, which can be used to circumvent or otherwise avoid the intent, implied or explicitly stated, of the system." 

The first thing to note about a loophole is that it is not a sign of illegality. Rather, it is a strict and literal adherence to legality (otherwise it's known as a "crime"). It means a law was written in such a way that strictly adhering to the letter of it leads to a consequence that was not intended by the lawmaker. For instance, my town has an ordinance requiring steps be built to exacting specifications for any entrance to a residence. This could be expensive for property owners when required even for entrances that aren't used. I once saw a landlord screw a sliding glass door shut and hang a sign on it reading, "this is a window". The intent of the law was code-compliant stairs at every working door. The result was one less working door. This is "exploiting a loophole".

The second thing to note is that many of the "loopholes" being talked about aren't even loopholes. They're intentional. For instance, a wealthy person pays a lower tax rate on income than a middle-class person. This isn't a loophole. This is because there is an intentional distinction in the tax law between "investment income" and "earned income". The government wants to encourage investment, so income from investments is taxed at a lower rate. Rich people are the ones with money to invest. Keep in mind that this money, if it just sat in a vault, would earn zero taxes for the government, because it would then be savings, not income! So the wealthy person invests his money, just as he's actively encouraged to do by the government, and then he's castigated by people (many of whom did the encouraging!) for "exploiting a loophole"!

So we hear scare stories that that the very wealthy (including President Obama, btw), pay a lower tax rate than their secretaries. Except, for the very wealthy, very little of their money comes from "earned income". Most of their money comes from investment income. If you're filthy rich you don't have to invest it. You can just put it in a vault, live off of it, and pay pretty much nothing for the rest of your life. We want that money in circulation where it can spur business and pay employees.

Getting that lower tax rate isn't shady business on the part of the investor... but crying about it is certainly shady business on the part of the politician. It's like raising the taxes on a carton of cigarettes to discourage smoking, then bitching at people who quit smoking "to avoid the tax". Or railing at people who put in solar panels because they get tax breaks for it. If you no longer want to encourage investments, then by all means raise those taxes, but don't blame investors for doing what you wanted them to do in the first place.

Of the ones that ARE actual loopholes, most rarely get talked about, because they're head-scratchingly complex. Like this one, reported in the Wall Street Journal.  In my opinion, the best way to close all manner of loopholes is to keep the tax code simple. All the myriad if-then clauses in the tax code add up to an incomprehensible mess that's relatively easily circumvented. Simple, unambiguous rules are harder to avoid.

Personally, I have no problem with pinning the minimum tax rate of the super-wealthy at something higher than what the middle-class pays for earned income. (It would be best to do this tax-raising when the economy is booming, though. Don't let class envy allow you to shoot down the economic recovery. Ask your local economist.)

But please, if you're in conversation with me, before you bandy about the scary L-word in scary all caps, make sure that what you're talking about is an actual loophole, or better yet, piss off. You getting upset about government-encouraged behavior simply makes you look foolish. And decrying the exploitation of loopholes as if it were a criminal act will get you limited sympathy; being limited to unemotional agreement that the loophole should be closed, with zero agreement whatsoever as to the moral or legal culpability of those who followed the letter of the law to its exacting conclusion. The Congress is full of lawyers; if they can't write a better law than this, vote them out. I already agree that loopholes (unintended consequences) should be closed, and you don't need to make yourself look silly to get my agreement on that non-argument.


  1. Interesting read, I guess you disagree with Reagan then.

  2. Romney and Ryan are talking a lot about "closing tax loopholes". Apparently they mean the mortgage interest deduction, but won't say so.

  3. First Anonymous;

    I do indeed disagree with Reagan on some things, and agree with him on others. From the tone of your post I surmise you either believe that disagreeing with Reagan is a bad thing, or that you're scoring some nebulous point by imagining that *I* should feel that way. What a funny little way of thinking.

    The thing is, I can believe something for myself, and still recognize the reality that it is legal for someone else no matter how repugnant or wrong it is to me. For instance, I can personally believe that it is entirely wrong to murder unborn children out of mere choice, while allowing that the law allows others to do so, having convinced themselves that what I find to be a callous, immoral, and utterly despicable practice is OK because it's legal. For some women I have more sympathy due to the variety of traumatic circumstances that lead them to very hard decisions... the kind of decisions no one should have to make, and which cannot be second-guessed by others. Note that when I voice a moral position, I voice it solely for myself; I haven't the authority to impose a moral judgement on others. Each will have to answer to God or his/her own conscience. You will find me neither opposing people who do it nor guilt-tripping them about it.

    Or take gay marriage. I'm not gay, and for myself, a marriage between a man and a woman would seem to be the most natural way of things. However, it's none of my business what other people do or don't do in their personal relationships. I also recognize the plain fact that marriage in this country can be performed in a clerk of court's office with no religious trappings at all, between people of any religion or atheists; so it cannot under any stretch of the imagination be subject solely to a Christian definition. To any reasonable person, the First Amendment should be sufficient to quash any religious argument against gay marriage, and the Fourteenth Amendment should be sufficient to counter all other arguments against it. Were I on the Supreme Court with like-minded justices, there would BE no legal argument against it. So I can oppose gay marriage for myself, but the end result of THAT is simply that I won't marry a man. Other people should do as they will. It is SO not-my-business that I won't be bothered to formulate ANY moral opinion about it.

    This is why you would get no agreement whatsoever as to the moral or legal culpability of those who followed the letter of the law to its exacting conclusion: it's because neither decision is mine to make. The legal decision is clear; the moral decision is personal. If you do not like the law, work to change it.

    In the particular instance of the video you link to, Reagan referenced the tax rates. The letter he received describes an executive who recognizes that it's legal to pay a lower tax rate than his secretary, though he'd prefer not to do it for himself. Sound familiar? Having read the above, it should. It's the same principle that I apply to a great many things that are legal. So obviously, I agree with both Reagan and Obama on the subject. After all, it was I who wrote this above: "Personally, I have no problem with pinning the minimum tax rate of the super-wealthy at something higher than what the middle-class pays for earned income."

    It's unfortunate that you should have missed that rather prominent statement. It would have lead you to a correct guess.

  4. Second Anonymous;

    Politics would be far easier if the candidates would simply say what they mean, and deliver what they say.

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