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Closing Costly Tax Loopholes Is No “Gimmick”

Senate Minority Leader Mitch McConnell yesterday rejected the notion that closing tax loopholes could contribute substantially to deficit reduction.  “[I]f you were to listen to the Democrats, you’d think all of our ills could be solved by raising taxes on private jets or energy companies,” he said, dismissing such proposals as “gimmicks.”

In reality, policymakers could reform or eliminate many costly tax breaks as part of a balanced long-term deficit-reduction package — or as part of a balanced short-term package to pay for delaying the across-the-board budget cuts (“sequestration”) slated to begin next month, as the President urged today.

Former Treasury Secretary Lawrence Summers recently highlighted a range of tax loopholes that wealthy people use to avoid counting huge amounts of income for tax purposes.

For example, the “carried interest” loophole allows investment fund managers to pay taxes on much of their compensation at the 20 percent capital gains rate rather than at normal income tax rates of up to 39 percent.  Other loopholes allow corporate real estate investors to exchange properties without incurring any tax and allow wealthy families to minimize their estate tax liability by undervaluing the assets that they pass on to heirs.

Closing just these three loopholes would raise more than $50 billion over ten years — enough to pay for more than half of the cost of lifting sequestration for the rest of the year.  Wouldn’t it be better to have private equity fund managers pay taxes at ordinary income tax rates, like everybody else, rather than cut education, science research, the National Weather Service, and many other areas indiscriminately?

Chuck Marr
Vicepresidente de Política Tributaria Federal