Let’s Celebrate Loopholes

I’ve just finished my income tax return. (Have you finished yours?) Silly me, I do it myself using TurboTax – all 59 pages of my federal return plus 80 for California. I’ve got investment income, including partnerships and foreign stock dividends, two small businesses, social security and a pittance of wage income from San Jose State University. And a bunch of deductions and credits.

The whole process puts me in a foul mood, and my wife and even the cats know to steer clear till it’s done. One reason is obvious: the mind-numbing complexity, even with TurboTax. Even more galling is the humiliation and gross indecency of dropping my pants financially. This is the land of the free?

The New York Times had an interesting article in last Sunday’s Magazine, “What’s the Easiest Way to Cheat on Your Taxes?.” The article led off with the assertion: “If economists ran the tax system, there would be virtually no exemptions or loopholes.” To which I say, just a cotton-pickin’ minute! If I ran the tax system, and assuming I couldn’t set the rate at zero, exemptions and loopholes would stay and maybe even multiply.

How can I say this after belly-aching about the complexity of my return? Simple – the complexities provide me enough tax-cutting opportunities to outweigh the damage to myself, my wife and the cats. I’ll leave the details out just in case the gentle folk at the IRS read this humble blog.

Why do I do it myself? Partly because I don’t want to spend hundreds or maybe thousands on a professional preparer, but also because his interests would not align exactly with mine. His primary goal would be to cover his rear, especially with the IRS cracking down on professional preparers. My goal is to achieve the right mix of boldness and caution in claiming deductions and credits.

A good bit of ink has been spilled (and electrons) about “fair taxes” lately. It’s unfair, says the Community Organizer in the White House, that Warren Buffett’s average tax rate (or was it his marginal rate?) is lower than his secretary’s. Conveniently overlooked is the fact that his dividend income has already been taxed at the corporate level. As Gene Epstein showed recently in Barron’s, when you add in that corporate tax you get a much different story. The rich pay a substantially higher percentage of their income than most of us on this basis.

So what is a fair tax anyway? The same percentage for everyone? No exemptions, no deductions? Why is that any fairer than a head tax – a levy of so much per person? How about a regressive head tax, since poor people tend to use more government services than rich people?

What of two people earning the exact same income? Surely fairness demands that they pay the same tax – equality before the law and all that. But suppose Mr. A is a struggling young man with lots of debt, trying to start a family while Mr. B has inherited millions. Both earn the same income but is it fair that they pay the same tax? I leave it to you.

When you get right down to it, there just isn’t any such thing as a fair tax, simply because taxes are coercive exactions – theft, if you will.

Still why wouldn’t a flat tax with no deductions be at least a small improvement, as Steve Forbes and other conservatives advocate? The late Murray Rothbard demolished that idea in The Case Against the Flat Tax. Here’s his comment:

“The closing of ‘loopholes’ under a flat tax will mean a merciless and continuing search-and-destroy mission by which the government will root out and obliterate every little hideyhole in which many of us have been able to squirrel away a bit of our own earnings and are own property, and keep them safe from the ever-expanding maw of the federal government.”

I concur. Let’s celebrate all the loopholes, not just those that protect some of our own income, but any break for anybody at all.

10 thoughts on “Let’s Celebrate Loopholes

  1. I can understand and respect your celebration – and thanks for sharing. I think I’m in too foul of a mood at this time to celebrate any theme related to taxes!!

  2. I can easily understand your thinking. My thoughts tend to be abolish the whole mess by repealing the sixteenth amendment and institute in the repeal a sales tax not to exceed 10% exempting food and fuel. And in a perfect world mandating a balanced budget.

  3. Gosh, taxes are just no fun. I remember working in politics seasonally as well as working for municipal elections boards and that alone was a pain in the keister. Luckily when I co-owned my recycling business, I was the brawn and experiential knowledge mogul. There’s nothing better than having a partnership with someone who does all of the paperwork! Being a stay-at-home dad and academic simplifies taxes a great deal. 😉

    Waited a while, didn’t you!?

    I think we did our taxes the last week in January. Congratulations on another year’s worth of paperwork done.

    • Actually I’ve been at it since October. The last of my K-1’s showed up in yesterday’s mail. ;-(

  4. Why is a pollution tax not a fair tax? If it is coercive, is the pollution, trespassing into others’ property, not also coercive?

  5. Why is a tax on the rent generated by governmental public goods not a fair tax? If it is not levied, the extra rent is a subsidy to landowners. Do free-marketeers favor such subsidy? If you want to abolish all government spending along with the taxes, I don’t argue against it. But if you want some government and an income tax full of loopholes, we get complicated audits; why is that so good? Why would government roll over and play dead when there are loopholes?

    • A pollution tax is unfair because the loot goes to the government, not the victims. A tax on government-provided public goods does not compensate those who were forced to pay for them, except incidentally.

  6. Thanks fer sharing the article on flat tax, an idea I have been supportive of in the past, but found his arguments compelling enough that if…well anyway I make so little income now it probably doesn’t matter lol…but my favorite line of the whole article was “But to me it is far from self-evident that the government, rather than we ourselves, should have the primary right to our own earnings.”
    Great topic thanks again

  7. I’ve always enjoyed doing my taxes, and your article points out one of the reasons: our tax code, with all its conditions and exceptions, actually preserves the individual’s sense of individuality. Each of our tax returns is as different as a snowflake–isn’t that crazy? but also kind of cool . . . . It mitigates the otherwise overwhelming impersonality of our relationship to our government today.

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