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.