Editor’s note: This op-ed is by Don Keelan, a certified public accountant who lives in Arlington.
One of the many contentious points raised during the debt-ceiling debate was the closing of tax loopholes. So what exactly is a tax loophole? An Internet site defines a tax loophole as:
“ …Loopholes are special exceptions in the tax code which allow those who qualify, virtually always corporations and special categories of rich people, to escape paying part of their taxes…”
Not exactly!
Allow me to describe a few of the so-called tax loopholes and why they got created in the first place.
With the help of a 3/3/11 Wall Street Journal piece on tax reform, let’s look at the Whirlpool Corp. — the appliance manufacturer. Congress (and the environmental lobby) wanted to have energy efficient appliances…so, Congress passed a tax credit law. Build an energy-efficient refrigerator, washer/dryer and dishwasher and the manufacturer will receive $200, $225 and $75 in tax credits for each one produced.
In 2010, Whirlpool had $18 billion in sales, $619 million in earnings and paid 0 in taxes; the corporation had built up over $500 million in tax credits. Note that tax credits are a dollar for dollar offset against taxes due.
Now let us pay a visit to the oil and gas companies. A long time ago, in the 1920s, Congress wanted investors to take huge risks and develop oil and gas wells in order to feed the insatiable appetite for oil required by the emerging auto industry. The cause gave rise to what is known as “percentage depletion.” What it means is that for every $1 in oil revenue, 27 percent was eliminated for tax purposes (now 22 percent). No wonder oil companies have a low effective tax rate — when almost a quarter of their revenue is excluded from income.
And many of us drive by or walk by another tax-loophole benefit each and every day — they are residing in those historic downtown buildings that got rehabilitated over the past 40 years. Once again, Congress was lobbied, this time by preservation groups, wishing to preserve the downtowns (inner-cities) and historic structures. Congress abided and authorized that for every $1 invested, one would receive a tax credit of 20 cents against income taxes.
Another favorite tax loophole is tax-exempt bonds. Take two taxpayers: one has salary income from his/her business of $100,000, the second has a similar income from state of Vermont bonds. The former pays approximately $30,000 in taxes while the latter pays 0 in taxes. Now make the tax-exempt income not $100,000 but $10 million — get the picture?
However, my all-time favorite loophole event has to do with Warren Buffett, the Berkshire-Hathaway billionaire. He will often cite the fact that his secretary pays more in taxes than he does — and here’s why. In order to assist non-profits, a long time ago Congress passed a tax loophole which under certain circumstances donations to nonprofits can be deducted. Mr. Buffett took full advantage of this and donated over $30 billion to The Bill and Melinda Gates Foundation. The gift was so large (there are annual limitations on how much one can deduct each year) that for the foreseeable future, Mr. Buffett can offset his millions in yearly earnings with the carry-over (unused) deduction made to the Gates Foundation.
The point in noting all of the above (and there are many more) is simple — as long as we have lobbyists advocating their cause in Washington for business, education, health care, nonprofit, pharmaceutical, defense and environmental organizations and companies, we will have “loopholes.”
If we really want to do something about taxes and “loopholes” here are a few suggestions:
- Phase in over five (it may take 10) years the “sunsetting” of the 1986 U.S. Tax Code.
- Phase in over a similar period a flat tax system whereby all income, regardless of source, is taxed at a flat tax rate.
- Phase in over the same period the elimination of all deductions, exemptions and tax credits.
The original Tax Code of 1913 was meant to raise revenue for the federal government — not to be the reservoir for every conceivable social, economic, environmental and energy program.
And as recently as last week, President Barack Obama proposed a tax credit to companies who hire veterans — using the tax system to execute a social/economic goal.
