At last, our elected representatives appear poised to commence serious negotiations on reforming the distended tax code as part of an effort to avoid the fiscal cliff. Rhetoric from both parties since the election has been encouraging, leaving open the possibility of a sensible and economically productive compromise that constrains entitlement spending and augments revenue.
On the income side, a workable and politically feasible approach should avoid raising marginal tax rates, but must result in more net tax revenue through the reduction or elimination of a variety or tax loopholes and deductions. As far as it goes, this seems eminently sensible and would no doubt elicit broad support. But the devil is always in the details, beginning with an understanding of just what the tax loopholes are.
Most, it turns out, are aimed squarely at the middle class.
Loopholes are technically referred to as “tax expenditures” by policymakers and represent lost revenue to the government due to specific provisions in the tax code that favor one party or class over another. For fiscal year 2014, the tax code includes nearly 200 tax expenditures, but the top 20 comprise 90 percent of the estimated $1.1 trillion in lost tax dollars.
The biggest single loophole is the exemption of employer-paid health care benefits from income taxation, costing the Treasury $164 billion next year. This tax break is a relic of post-World War II wage and price controls, but after 65 years has become institutionalized and is now viewed as practically incontestable.