9 Tax Loop Holes to Fix in Order to Curb America's Debt

The debate about cutting the annual deficit and the national debt will be front and center during this election. Misinformation and spin have made the electorate impotent bystanders in this debate. Frankly, most people have no idea how large government tax breaks are and which ones should be eliminated or reformed to save money. 

The Obama mantras relating to the affluent are: “pay your fair share” and “level the playing field.” These are empty slogans created to accommodate an electorate that is incapable of understanding the complexities of the tax code. Moreover, the slogans enable the Obama administration to fan the flames of class warfare to make political gains in speeches each and every day. This essay will provide some hard facts about tax benefits provided by the federal government that accrue to individuals and corporations. Hopefully, if voters become better informed, they will be able to participate in the debate relating to our tax code and have a say in its ultimate reform. Frankly, eliminating certain benefits will be more palatable than increasing tax rates for the affluent.

Annually, our government “showers individuals and companies with an ... array of special exemptions, credits, and deductions that amount to a $1.1 trillion giveaway each year.” About half of this money comes from nine specific programs:


(1) Tax-free health insurance contributions: Subsidizes the nation’s employer-based health insurance system. Benefits provided are not taxable.

(2) The mortgage interest deduction: Subsidizes home ownership.

(3) Treatment of capital gains at death: Government forgives accrued capital gains on assets that are passed on to heirs.

(4) Tax-free contributions to 401(k)s: Employees and employers can make tax free contributions to retirement plans.

(5) Exclusion of net imputed rental income: Homeowners do not pay themselves rent. Subsidizes homeowners.

(6) Deductibility of state and local taxes: Taxes paid to state and local governments reduce a taxpayer’s ability to pay federal taxes. But, state and local taxes are payment for services received from those governments.

(7) Accelerated depreciation: The government enables companies to write off the cost of equipment faster than the useful life of the equipment.

(8) Capital gains: The profit from the sale of assets held for more than a year are taxed at a beneficial rate far less than ordinary income tax rates. This supposedly encourages more investment.

(9) Deductibility of charitable contributions: Donations to charity are deductible for tax purposes.

It would appear that significant savings could be derived from reform of several of the items above. For instance, if employees earning over a certain level would no longer be able to obtain medical insurance from their employers without taxation, the government would enjoy a large increase in cash inflows. The same holds true for deductibility of mortgage interest over a certain level of interest payments and/or a certain income. Further, the affluent do not need the 401(k) benefit, as it does not materially impact the lifestyles of this group after retirement. And finally, reducing the deductibility of state and local taxes for the wealthy should be considered.

The step up in capital gains at death is a benefit directed towards the affluent, however, the amount of estate taxes paid at death would be less if the step-up feature were to be eliminated. Additionally, elimination of the deductibility of charitable contributions seems shortsighted because not-for-profit entities would lose significant support.

Accelerated depreciation benefits to corporations are an important consideration for capital purchases. Any change that would decrease deductions could have a material impact on new equipment acquisitions. This, in turn, could affect hiring and decrease the sales of heavy equipment by American companies. Capital gains are an area with of great controversy. Many experts believe that reducing capital gains benefits will impact investment in this country, something that would be bad for future economic growth. However, a change in this benefit would primarily impact the super wealthy, a very small group of Americans with out sized wealth.

It is difficult to estimate the increase in revenues for the federal government if changes were made, but the items listed above will account for $662 billion of lost revenue in 2012 and over $4 trillion over five years. Seemingly, there is a lot of opportunity in these numbers especially if they were to be accompanied by a reduction in individual federal tax rates.

I believe there will be much less resistance to obtaining revenues from these items than by increasing individual tax rates. Going down this path will afford the negotiators a great amount of latitude and increase the possibility of generating significant revenues to accompany large proposed cuts in spending.

Photo Credit: 401(k)