Congress Can’t Avoid Tax Rate Hikes By Closing “Loopholes”

By :: November 13th, 2012

You can tell when Congress and the President have tough choices to make. That’s when they trot out the euphemisms—all aimed at making what they are about to do sound as benign as possible.  Case in point: the impending fiscal cliff.

If you listened to President Obama and House Speaker John Boehner’s radio addresses last Saturday, you got an earful of these weasel words, ranging from the merely misleading to the truly Orwellian.

Here are just a few:

Closing tax loopholes: This is a favorite of both parties, but these days it is being used mostly by Republicans who are looking for an alternative to raising tax rates on high-income households. The phrase appears regularly in Boehner’s presentations.

It is true that the tax code includes loopholes that should be closed. But these are narrow and usually unintended gimmicks that allow a handful of sophisticated taxpayers to avoid tax.

Congress will need to raise more than half-a-trillion dollars over a decade to protect top-bracket taxpayers from Obama’s plan to let their tax breaks expire without adding to the deficit. To get there, it will need to cap popular, broad-based tax preferences, such as deductions for mortgage interest, charitable giving, and state and local taxes. It isn’t going to get far by closing a few loopholes.

Entitlements: When politicians use the word entitlement, they really mean Medicare, Medicaid, and Social Security. At least two of those programs, Medicare and Social Security, are enormously popular. So nobody talks about slowing the growth of these senior health care and pension programs.  “Entitlement” carries with it a sense of privilege and greed. So much easier to cut en entitlement than to trim promised Social Security benefits.

Shoring up entitlement programs.  This is another Boehnerism.  It is not enough, it seems, to say entitlement instead of Medicare and Social Security.  Now, pols insist they are “shoring up” these programs when they really mean they want to trim promised benefits. For programs that are funded through trust funds, such as Social Security and Medicare Part A, “shoring up” has some meaning (assuming you believe in the trust fund concept at all). But for the rest of Medicare and all of Medicaid, there is nothing to shore up.

These programs are funded through general revenues or, in the case of Medicare, general revenues plus premiums and co-pays. By spending less than government currently expects, you don’t strengthen them.  They are being shorn, not shored up.

Making people like me pay a little more: This was an Obama favorite in the campaign. And it never seems to go away. The Tax Policy Center estimates the top one percent of households (who make an average of about $1.7 million) would end up paying almost $94,000 more in taxes under Obama’s 2013 budget, or about 6 percent of their income. I know these folks make a lot of money, and probably can manage this higher tax bill, but a nearly six-figure tax hike is a tad higher than “a little more.”

And it is worth noting that there are not very many people who make Obama-like money.  In 2012, there will be only about a half-million households in the top two tax brackets (out of nearly 160 million).

All of this rhetoric is intended to make deficit reduction sound painless. Somebody else will pay—or Congress is not really cutting at all. That mush may have been useful in campaign season. But lawmakers have some obligation to prepare voters for what will be some tough decisions over the next few years. Honest talk is a good way to start.


  1. rjs  ::  9:06 pm on November 13th, 2012:

    confusing headline; ie, “tax rate cuts”

  2. Michael Bindner  ::  8:57 am on November 14th, 2012:

    Both Bowles-Simpson and Rivlin-Domenici “shore up” entitlements – with raising the income cap being one of the common reforms, as well as changing bend points and increasing premiums of Medicare to 35% of cost. If you raise the base benefit amount, you could certainly make a premium increase painless.

    My proposal for shoring up Social Security is to put a floor on employee contributions and lower the cap so that benefits are lower at the high end. I would shift the employer contribution to a consumption tax with no cap and with each worker receiving the same credit based on an average to fund the basic benefit. Using a Value Added Tax would make it border adjustable while going to a VAT-like Net Business Receipts Tax may include border adjustability – although not necessarily so if the program were to include personal retirement accounts holding employer voting stock.

    As for changing tax expenditures – the biggest tax expenditures to be modified are the special rates paid for dividends and capital gains. I suspect that the school solution is to end these special rates while driving the top tax rate and the corporate rate (which might be replaced by the Net Business Receipts Tax mentioned above) to somewhere between 25% and 31%.

    Such proposals are too good not to score. Please do so.

  3. Tax Roundup, 11/14/2012: So what about the other $8.4 trillion? « Roth & Company, P.C  ::  9:16 am on November 14th, 2012:

    […] Howard Gleckman,  Congress Can’t Avoid Tax Rate Hikes By Closing “Loopholes” (TaxVox) […]

  4. Michael Bindner  ::  3:54 pm on November 14th, 2012:

    No, the hike is the status quo in the law.

  5. AMTbuff  ::  6:41 pm on November 14th, 2012:

    I agree that “shoring up” would be better expressed as “squaring with reality”. That description clarifies the underlying problem: the promised benefits are simply not affordable.

    We need to present this to the public as we would present the truth to a client of Bernie Madoff. The promised benefits WERE NEVER REAL. Forget them. The available money is going to be divided up equitably, not according to what Madoff promised on his phony account statements.

    Fantasy promises are never an appropriate baseline for this discussion unless you are a politician aiming to mislead voters.

    Unrelated to this, am I the only one getting tired of the abuse of the English language in calling rationally based adjustments to taxable income a “loopholes”? By this twisted logic any taxation less than 100% of your income could be called a loophole.

    Here’s my favorite loophole. Everyone now breathes the government’s air for free. We need to tax that imputed income. I predict very little change in behavior in response to this task. Breathing is highly inelastic. Furthermore, according the Supreme Court Congress can do anything it wants as long as it call it a tax. So how about it, economists? What’s wrong with a breathing tax?