Tax Reform

Eliminating Tax Loopholes Is the New Waste, Fraud, and Abuse


Copies of the bill sit at members' places during the meeting of House and Senate conferees to consider the Jumpstart Our Business Strength (JOBS) Act

Photograph by Scott J. Ferrell/Congressional Quarterly/Getty Images

Copies of the bill sit at members' places during the meeting of House and Senate conferees to consider the Jumpstart Our Business Strength (JOBS) Act

We’re going to fix this relationship by learning to talk with each other. I’m going to lose weight by eating less and exercising. The U.S. can bring in more revenue by eliminating tax loopholes and deductions. To these plans there is only one appropriate response. It’s a good idea. And if it were easy, you would have already done it.

Budgeting is hard. You can’t do it properly without taking away something that someone has gotten used to, so it makes sense that we seek out insignificant scraps that can be trimmed and gathered into enough savings to avoid any tough choices. Politicians once called this “waste, fraud, and abuse.” Presidents throughout the 20th century have attempted to make government cheaper and more efficient. But waste exists because it’s in someone’s interest that it remain there. Overlapping, confusing government federal programs are paired with overlapping, confusing committees in Congress. What a president sees as waste, a committee chairman sees as power.

Fraud and abuse have constituencies, too. Last year a commission reported to Congress that fraud and abuse among contractors in Iraq and Afghanistan had cost $30 billion to $60 billion from 2002 to 2011. The commission determined that the federal government had little oversight over contractors and that private companies had taken over too many jobs from the military. These developments were not accidents: Weak oversight and privatization happen because someone with pull wants them to.

And so it is with tax deductions. This year, both campaigns have suggested getting rid of them, an idea so appealing in principle and toxic in practice that both parties have agreed to refer to it with the same euphemisms: “tax reform” and “broadening the tax base.” These both mean “taking in more money” and “taking something away from someone.” Mitt Romney has suggested lowering both corporate and personal taxes and paying for them by ending tax breaks. He has not suggested publicly which tax breaks he might end. Barack Obama has proposed ending a set of deductions for businesses, including corporate jets and oil and gas subsidies, but his tax plan preserves deductions for corporate research, domestic manufacturing, and renewable energy. Last year the president’s commission on fiscal reform, also known as the Simpson-Bowles commission, laid out a complete and painful list of tax deductions that should be eliminated. The president and both parties in Congress promptly stepped away from the commission’s report.

A March report on personal income tax reform by the Congressional Research Service drily points out why both candidates don’t want to get too specific. “There are impediments to base broadening by eliminating or reducing tax expenditures,” the report concludes, “because they are viewed as serving an important purpose, are important for distributional reasons, are technically difficult to change, or are broadly used by the public and quite popular.”

The 10 biggest personal tax expenditures, which together account for 70 percent of all personal tax breaks, are as follows: the exclusion of employer health insurance, the exclusion of employer pensions, the mortgage interest deduction, the exclusion of medicare, lower capital gains rates, the earned income tax credit, the deduction of income taxes, the exclusion of capital gains taxes at death, the deduction of charitable contributions, and the deduction of employer benefits under cafeteria health plans. Half of these are some of the most cherished favors government bestows, and the other half is a short list of what Congress has spent the past three years fighting about.

Eliminating them may be good policy. But it is impossible politics. This does not mean that the next president, whoever he is, should not attempt to simplify the tax code, or broaden the tax base, or whatever he decides to call it. It does mean that no one should be allowed to refer blithely to “eliminating deductions” as if it were merely a precondition, a move on the way to the endgame of either preserving social programs or reducing tax rates. Eliminating deductions will be very difficult. It’s almost the whole game.

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Greeley is a staff writer for Bloomberg Businessweek in New York.

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