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Bandits and Loopholes

January 15, 2004

The Bush administration credits its tax bill for spurring economic recovery, though if you include the debt these big spenders have racked up, the net cost of government to the American taxpayer has vastly increased during the Bush presidency. And like all previous cases of GOP tax reductions, the same administration is sneakily doing what it otherwise says it opposes in principle: increasing taxes—some $45 billion over ten years.

What is the rationale for this apparent departure from the main rhetoric of the Bush presidency? The usual: it is not raising taxes, they say, and they point to the tax rates to prove it. Instead, they are merely closing loopholes. The effect is the same, however. Taxes that people didn't pay in the past, they will be paying in the future. Call it what you want, but in the history of political economy, this is usually called a tax increase.

What is a loophole? For the criminal mind, the lock on your door, the combination code on your safe, and the weapon you keep for protection are all loopholes you use to escape the work he wants to do. If he had his way, all these loopholes that permit you to maintain privacy and security would be closed forthwith. The result for him would be vastly more revenue.

So it is with government and tax loopholes. No government can possibly get away with taxing you as much as it would like. No people will put up with a complete fleecing, and so people are always trying to find ways to keep more of what they earn. The customary compromise is the loophole, which is to say, provisions of law that allow people to keep a bit more of their own property than they would otherwise be paying with a tax applicable across the board. Yes, this creates complexity, just as safes and locks do, but it is better than the alternative.

Loopholes come about through the pleading of property owners who dare to suggest that there is merit to keeping private property safe from the grasping hand of power. The campaign against loopholes, meanwhile, presumes that all property belongs to the government. The attempt to repeal them is usually done in the name of cracking down on the rich, or tax simplification ("let's keep this simple," said the mugger), or imposing a flat tax.

Let us count the ways.

  • Fleece citizens with foreign income. Currently, certain provisions in the law permit US citizens to claim some credits in income earned abroad, so as to avoid double taxation. The Bush administration is making that impossible for foreign withholding taxes. It also requires a longer timetable on foreign property holdings to make them eligible for credits.
  • Crush the tax benefits for leasing transactions. Private owners of local infrastructure currently benefit by leasing their holdings to state and local governments. This has created a boom industry in municipal service leasing. It generates revenue for local governments but the real point is the feds are upset that they are losing out. The Bush administration wants to get rid of the tax benefit solely for the purpose of feeding more cash to the central state.
  • Not all forms of contracting and leasing are being discouraged. If you run a collections agency, the government wants to use your services to nail people who owe the government money. This is the worst and most corrupt form of privatization, akin to the tax farming that led to the overthrow of governments in the ancient world and is so frequently labeled sinful in the Bible.
  • Hammer in-kind charitable donations. People commonly give cars, houses, land, patents, and other kinds of gifts, to their churches or other nonprofit organizations. It is up to the donor to place a value on the property for tax purposes, and this has long been an audit flag. The Bush administration claims people are overvaluing their gifts, and wants to impose new appraisal requirements, and even limit the amount that can be claimed as a charitable contribution. This can only result in discouraging giving.
  • Put the screws to casualty insurance companies. Certain kinds of small casualty insurance companies are not subject to federal income tax. The government believes some people have actually set up these companies solely to avoid taxation. Imagine that! Except that the whole reason for the exemption was precisely to encourage this. Nonetheless, the government is cracking down. You had better have a darn good reason for any involvement in the casualty insurance racket.
  • Under the college savings plan, tax benefits were permitted to allow people to save for their kids. But the government believes people are abusing this through a variety of measures that permit the name of the beneficiary to change. A few dimes might be falling through the cracks, and we can't have that. The Bush administration says it only wants to make the program more "administrable and equitable" but, surprise, it also expects the new equality and efficiency to redirect some clams its way.
  • In addition to the immigration problem, the US has an emigration problem, as more and more people renounce citizenship to get away from the tax state. But it's not that easy. As if to remind us that we are all slaves to the state, the Bush administration plans to slap an extra link on the chain of expatriates. To the everlasting disgrace of the US government, it taxes people for a full ten years after they cease being citizens. Some aspects of the law allow people some flexibility and those will be repealed. Also, the government will presume the right to tax you forever until you give explicit notice to the effect that you are no longer a citizen, and once you do this, you can't be in the country for more than 30 days per year, and you must file an annual report. This is especially stinging in light of the proposals to fingerprint law-abiding visitors while granting citizenship to millions of illegal aliens.

Many provisions are way too complicated to use this space to explain in detail (and your tax attorney will enjoy charging you to explain them anyway), but they include attempts to :

  • Tighten the deduction limitation for interest paid to related parties.
  •  Prevent avoidance of U.S. tax on foreign earnings invested in U.S. property.
  • Curb "frivolous" returns and submissions.
  • Terminate installment agreements when taxpayers fail to file returns or make tax deposits.

At the same time it is eliminating some loopholes, it is creating more in an attempt to encourage more use of the Earned Income Tax Credit and boost adoptions. No doubt that at some point in the future, some administration will express shock that more people are taking advantage of these to avoid taxation, and then close these loopholes too. In this way, the government treats us all like Pavlovian dogs they can feed and starve to get us to behave a certain way, while the psychiatrist keeps changing his mind.

To add the final insult to this litany of injury, the Bush administration is proposing a huge range of new penalties for failing to comply, and giving the federal collection bureau a big 4.8% raise in one year to make sure not a single nickel is lost.

Do you see what is happening here? The Bush administration came to town impressed that they had the whole of a nation's wealth at their disposal, and went on a mad spending spree: war, welfare, yippee! Reality caught up to these bandits when the debt and deficit figures began to explode. But rather than blame themselves, they have taken aim at the taxpayers, who they claim are not forking over enough. Loopholes are the cause of the budget calamity, they say.

We'll know we have a president who cares for the public interest when loopholes are praised and expanded. As Murray Rothbard said, we would all be better off if the entire tax code were one big loophole. To close them is to do precisely what we should always expect government to do with its insatiable appetite for other people's money.

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Llewellyn H. Rockwell, Jr. [rockwell@mises.org] is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com. He is the author of Speaking of Liberty.


Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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