In defense of eliminating loopholes

via "Mises":http://www.mises.org/fullstory.aspx?Id=1672:

bq. To call such proposals "socialistic" is no exaggeration, for the underlying premise of all such talk is that the state has a "right" to all income that is produced, and that "loopholes" deprive it of some of that income and should therefore be eliminated. This is, in fact, the premise behind all forms of direct taxation. As explained by Frank Chodorov in his classic book, The Income Tax: Root of All Evil (p. 11), the state is saying to its citizens: "Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide." Moreover, "the amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it."

This is all well and good in theory. However, by allowing those with lots of money (and therefore power) to "escape" from unjust taxes, we reduce the likelihood that those taxes will ever be reduced for those of us without the power or money to lobby for loopholes for ourselves, thus ensuring that the tax system that results will forever be regressive in practice, increasing over time the burden on the poor and the middle class.

While I agree that the argument against loopholes on the basis that the government has the "right" to that money is bunk, that is merely a straw man. The better argument for eliminating tax loopholes, which the Mises Institute has conveniently ignored, is that *all* of us need to feel the pain of unjust taxes, or we have no hope of ever seeing those taxes eliminated or even reduced.

Disclaimer (claimer?): I own a house and it would seriously harm my fortunes if the mortgage interest deduction "loophole" were eliminated. It has to go sooner or later, though, and if it means I have to feel pain, then so be it if we can get rid of that nasty income tax.

Update: Joseph at "Pragmatic Libertarian":http://pragmaticlibertarian.blogspot.com/ makes the argument that "the ability to put tax loopholes into the law promotes rent-seeking.":http://pragmaticlibertarian.blogspot.com/2004/11/tax-simplification.html

Another update: Excellent quote from Tyler at "Marginal Revolution":http://www.marginalrevolution.com/ (via "Pragmatic Libertarian":http://pragmaticlibertarian.blogspot.com/2004/11/tax-simplification.html): "_All tax systems are too complicated, and moves toward simplification are rarely a mistake._":http://www.marginalrevolution.com/marginalrevolution/2004/11/how_about_a_fla.html

Share this

I'm not sure I agree with

I'm not sure I agree with the argument that tax loopholes only benefit people with money and power. I'm in grad school, and my fiance and I are getting by as best we can. Every now and then, the government actually comes up with ideas that might help us, like health savings accounts and IRAs. It frustrates me to read and listen to the media and hear HSA's panned as "tax shelters for the wealthy" and tax-deferred retirement saving disparaged as "something only rich people can afford to do" (news to me, since I save). Personally, I lean toward supporting tax loopholes in hope that one might eventually reach me.

I'm slightly uncomfortable

I'm slightly uncomfortable with the argument that we should hold group A hostage for the sake of eventually liberating group B. Uncomfortable, but not 100% opposed. Sometimes politics is an ugly game.

That said, there's another argument for eliminating loopholes, and that's that some loopholes create really pernicious incentives. The tax-free status of employer-provided health insurance (especially before the HSA modification) provides an excellent example. It encourages people to get their health insurance through their employers, and to get as much of their healthcare in the form of insurance as possible.

As I mentioned, I benefit

As I mentioned, I benefit from certain tax loopholes, and I'm certainly not wealthy or powerful, but I'm more wealthy than some. I plan to set up an HSA at open enrollment time, and I have a 401k. However, there is no reason for the government to be encouraging certain types of spending or investment over others through these sorts of tax incentives. If saving for retirement is what people want to do, people will do it.

"Group A" are the ones with the power to lobby the loopholes for themselves, so they're the ones sticking those without that power with the bill. All I'm saying is that allowing that to happen results in further harm to those who already don't have the power. Of course, as long as this situation exists, I don't see how the loopholes could be eliminated, because the people with the power don't want to pay the taxes, and those without have no say, and that's how it always will be barring some major change. Therefore, the loopholes will always exist barring some major tax reform that lowers taxes for everyone, which would require a huge cut in spending. Isn't it the law of Bitur Camember that says that most of any resource available for redistribution will be spent lobbying to get or keep more of that resource?

Anyway, I just think the Mises Institute is wasting political capital by arguing in favor of loopholes. Perhaps I should have said that in my original post.

"This is all well and good

"This is all well and good in theory. However, by allowing those with lots of money (and therefore power) to “escape” from unjust taxes, we reduce the likelihood that those taxes will ever be reduced for those of us without the power or money to lobby for loopholes for ourselves"

This post displays a rather ugly streak of naivete, ignorance and perhaps envy, in my humble opinion.
The idea that allowing no one to escape the tax system through loopholes will eliminate or bring down the tax rate is quite simply silly. It was shrinking revenues due to massive escape of taxable income during the latter half of the 20th century that led to the lowering of the income tax in the west, not shutting down as many loopholes as possible so that our rulers can decide; "Hey, the serfs....er...people are paying too much with no way out! Lets lower taxes." HAH, but pardon me if I think that sounds naive and unrealistic. If someone has found a loophole out of paying some aspect of the already far too excessive taxes we should cheer for them and try to find our own way to do likewise.Tolstoy once spoke of how the finest way to destroy tyranny is to dodge, subvert and ignore it wherever possible. Using loopholes is a good start.
Furthermore, I think the argument that Dilorenzo put on mises.com is valid and certainly a good one.

Here's the problem. The

Here's the problem. The argument for closing loopholes is an argument for raising taxes. There is no moral or economic basis for doing this. As for the strategic rationale that we should all feel more pain so that we will all resist together, well, that state could get rather carried away with that idea. I've actually heard libertarians argue for the draft on the same grounds (that it would make everyone antiwar). It is strange to think of intellectual twists and turns that land libertarians in the camp of advocating higher taxes, tighter thumbscrews, etc. Talk about a waste of capital.

Sure, why not bump everyone

Sure, why not bump everyone up to 100%. Russia
was taxing at that rate not long ago. Then they
started shooting tax collectors. Now their rates
are at 15% last I heard.

That's one way to lower the thievery.

The "make it worse so they

The "make it worse so they get angry and revolt" thing has been a component of various revolutionary ideologies, and it mostly fails. I think the reason why is: people revolt towards what they see as a glorious future, not merely away from an unpleasant status quo. Unpleasantness in the now might even be a distraction, because it occupies effort.

If they already wanted to become Libertarian, high taxes can be an excuse.

If they've never heard of the idea, high taxes are just another burden.

Jake: So the fact that

Jake: So the fact that loopholes make the tax system regressive doesn't bother you at all? The tax accountants making $$$ off of finding the loopholes for their rich clients doesn't bother you either? I sure as heck save a good deal of money via loopholes. I suppose you feel comfortable simply ignoring the fact that not everyone owns a home or can afford one at the current ballooned prices.

Jeffrey: Loopholes are fraud, plain and simple, just like inflation. When the tax system is too complicated for a single person to understand if taxes aren't their profession, yet the person who can't afford a tax accountant still has to pay taxes, and they pay on the assumption that everyone else is paying on the same scale, that's fraud.

IMHO it's time to start attacking government spending rather than taxation. When they lower taxes, they just increase their borrowing. That's great if you own a home or stock or gold, but not so good if you're working for a salary, watching your purchasing power go down every year. When it comes to the "sucking" end, i.e. taxation and borrowing, we should be arguing for the least fraudulent means of acquiring funds, so that everyone can feel the pain of the government's lavish spending now before it's too late.

Sean: You ignored one of the

Sean: You ignored one of the important things I mentioned in my argument.
Tax dodgers are the reason our income tax rates in the west are lower then in the decades shortly after WWII. Secondly its also like Lisa Casanova mentions; Tax loopholes are not just "for the rich" Millions of Americans use them every year, theres all sorts of these loopholes, some exist only for truly wealthy people and theres many that are for the middle class and poorer.
IF one takes your argument to its conclusion then you could say that we should all cooperate with the government in every way they ask us to because if we dont we will just make it harder and more repressive for those that dont, and if we do listen things will surely get better. Like I said before, thats ridiculous. You could excuse anything the state does like that and condemn anyone who resists. I grant your point that loopholes are a fraud, so is the entire idea of progressive taxation, and the means by which inflation occurs as well. In other words if there is a fraud, its entirely the governments and you cant blame self-interested individuals for taking advantage of it, that is a good thing.

Jake: People will dodge

Jake:

People will dodge taxes with or without loopholes. If they have to break the law or leave the country to do it, then so be it. It will have the same effect. That's what people do in India right now when purchasing a house. It's called "black money."

I am not saying anyone should cooperate with the government. I strongly believe people should ignore bad laws and refuse to pay taxes they don't agree with. It's the American way. However, as when you ignore bad laws, you should be prepared to face the consequences rather than just getting to sit back comfortably when you do so. It's nice to be able to "protest" from your comfortable armchair, but you have far more credibility when you're risking your butt in the process.

So fine, let's keep the loophole lobbyists, but let's find a way to allow the government to ignore those lobbyists when the lobbyists are trying to carve out loopholes for their clients rather than trying to lower the overall tax rate in a non-fraudulent manner.

Not everybody can pay taxes:

Not everybody can pay taxes: many are net recipients of taxes -- through government salaries, welfare etc. Therefore the notion that everyone can feel the pain of paying taxes is nonsense. I expect better from this blog than weak arguments for yet more taxation.