[Vision2020] Closing Loopholes Isn’t Enough

Art Deco art.deco.studios at gmail.com
Fri Dec 28 08:17:47 PST 2012


  [image: The New York Times] <http://www.nytimes.com/>

------------------------------
December 27, 2012
Closing Loopholes Isn’t Enough By LEONARD E. BURMAN and JOEL B. SLEMROD

REPUBLICANS in Congress say they will do anything rather than raise tax
rates. Apparently, that includes rushing
headlong<http://www.nytimes.com/2012/12/27/opinion/a-fiscal-cliff-endgame.html>over
the fiscal
cliff<http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-explained.html?pagewanted=all>and
throwing the economy into a possible recession.

When, in an effort to avert the now infamous tax increases and spending
cuts to take effect on Tuesday, House Speaker John A. Boehner proposed his
so-called Plan B<http://www.nytimes.com/2012/12/19/us/politics/backing-off-deal-boehner-invokes-plan-b-on-taxes.html?_r=0>—
which would have nudged up tax rates only for those earning over $1
million a year — rank-and-file Republicans promptly rebelled, storming
their party caucus with the rhetorical equivalents of pitchforks.

One can’t argue with religion — and for some, the unwillingness to bend on
marginal rates is just that. But for many politicians, the refusal to raise
tax rates rests on a faulty premise.

The Congressional Budget Office
projects<http://www.cbo.gov/sites/default/files/cbofiles/attachments/06-05-Long-Term_Budget_Outlook_2.pdf>that
if the United States follows a likely scenario in terms of demographic
changes, spending and economic growth through 2035, America’s coffers may
fall short by as much as $2 trillion a year in current dollars. With a
predicted gap so large, any deal to restore the country’s fiscal balance
must include at least some new revenue.

But even those Republicans who acknowledge that additional tax dollars will
be necessary say we can get what we need without increasing a single tax
rate. All we have to do is close up some “loopholes” and “broaden the
base”! We can keep in place the Bush-era tax cuts, they say, and make up
any lost revenue simply by eliminating various deductions, exclusions and
credits.

At first glance, the idea seems great. Who wouldn’t want to root out the
tax evaders and finaglers who are shirking the shared burden? And the idea
of a broader base of taxpayers paying lower rates across the board sounds
so much simpler and fairer for every citizen.

But closing loopholes is neither sufficient to do the job nor as “fair” to
everyone as it might seem.

There is no painless way to raise revenue, as past attempts have shown.
Increased levies on corporations are ultimately passed along to
shareholders, workers or customers. Raising taxes on foreign companies
increases the cost of capital as businesses keep their cash overseas. Even
a fix as “obvious” as doubling down on audits to catch tax cheaters ends up
creating a burden for honest citizens caught in the snare.

Closing loopholes and purging deductions are no more exempt from the laws
of tax physics than any of the above.

Both Democrats and Republicans have considered phasing out the mortgage
interest deduction, and there are good economic arguments for doing that.
But it might depress an already weak housing market and hit some
middle-class homeowners hard.

Eliminating the charitable deduction could devastate many philanthropic
organizations and the people they serve. You can go down the line with many
exemptions, deductions and credits and find an unintended, and unfortunate,
consequence.

Likewise, more sweeping attempts to broaden the base can end up doing more
harm than good.

Most states tax only retail sales to consumers — but some, for example,
also tax sales to other businesses. This tax, called a gross receipts
tax<http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=9&sqi=2&ved=0CGgQFjAI&url=http%3A%2F%2Fwww.ctbaonline.org%2FAll%2520Links%2520to%2520Research%2520Areas%2520and%2520Reports%2FHome%2520Page%2FFact_Sheet_GrossReceipts_3-2007.pdf&ei=wpLcUJeIOsyu0AHXrYHAAw&usg=AFQjCNHNMojMXooXKCrIGBKAXvKweeZu7Q&bvm=bv.1355534169,d.dmQ>,
certainly has a larger base than a retail sales tax since businesses at
each stage of manufacturing, distribution and marketing end up being taxed.

Supporters of the idea say this cascading tax can be assessed at a much
lower rate and still collect the same revenue over all, spreading out the
pain. But it is a poorly designed
tax<http://taxfoundation.org/article/tax-pyramiding-economic-consequences-gross-receipts-taxes>,
because it taxes products that involve many stages of production more than
those produced in only one or two steps. That, in turn, encourages
companies to merge to avoid paying multiple layers of tax — whether or not
that makes any business sense.

To be sure, there are constructive ways to broaden the base. There are few
compelling reasons, for example, that employer-provided health insurance,
which is part of compensation, should be exempt from income tax. This tax
break costs <https://www.jct.gov/publications.html?func=startdown&id=1193>around
$250 billion a year and makes gold-plated health insurance more
attractive to workers, which drives up health costs. Eliminating
it<http://www.nber.org/bah/2010no1/w15766.html>would be a good first
step in shoring up the federal budget.

We could also turn the mortgage interest deduction into a flat 15 percent
tax credit and cut the maximum deductible mortgage to $500,000, which would
help many homeowners who do not itemize deductions, while curtailing
subsidies for high-income people who don’t need help. This would raise
about $40 billion in 2014, according to the nonpartisan Tax Policy
Center<http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=3404&DocTypeID=7>.
And we could allow a deduction for
charitable<http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12085/03-10-reducingthedeficit.pdf>contributions
over 2 percent of adjusted gross income, which would save $20
billion in 2014 without discouraging most donations.

But in the end, none of these fixes will be enough to raise the revenue we
need to balance the budget, begin to pay off America’s debt and avoid the
fiscal cliff. Nor can we cut spending enough to achieve those goals. An
aging population expects the government to make good on promises for
retirement support and increasingly expensive health care — so cuts in
popular programs big enough to avoid higher taxes are simply not in the
cards.

That leaves us with one choice: do all of the above. Let’s trim spending
where we can, broaden the base where it makes the most sense and, yes,
raise marginal tax rates as well. Returning tax rates to Clinton-era levels
for married filers making over $250,000 a year and singles making $200,000
or more, as President Obama has proposed, would be a good start, and might
provide the impetus for more serious discussions of tax and entitlement
reform.

The only thing we shouldn’t do is pretend any of these fixes will be
painless or easy for everyone. They won’t. Even in a happy, thriving
democracy, someone ends up holding the bag.

Leonard E. Burman <http://www.maxwell.syr.edu/burman/>, a professor of
public administration at Syracuse University, and Joel B.
Slemrod<http://webuser.bus.umich.edu/jslemrod/>,
a professor of economics at the University of Michigan, are the
authors of “Taxes
in America <http://tinyurl.com/taxesinamerica>: What Everyone Needs to
Know.”




-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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