Does the U.S. tax code have too many tax credits and loopholes? Most liberals, many conservatives, and some libertarians say that it does.
Speaking at the Poor People’s Moral Action Congress forum for presidential candidates that was held in June at Trinity Washington University in Washington, D.C., former Vice President Joe Biden told the crowd that because “everyone is entitled to have total health care,” “every single person in the United States should have access to Medicaid right off the bat.”
And how did Biden propose to pay for this? Among other things, he said that “eliminating tax credits and loopholes would pay for universal access to Medicaid.”
After his appearance, a Biden spokesman clarified things a little, saying that Biden would provide “access to a Medicare-like public option” and not charge premiums to people who would qualify for Medicaid if their states had expanded it under the provisions of the 2010 health care law.”
Many conservatives and some libertarians agree with him—not on health care, but on eliminating tax credit and loopholes.
Many conservatives and some libertarians are still upset that not everyone is pleased with the $10,000 cap on state and local tax (SALT) deductions that was part of Trump’s tax “cut,” the Tax Cuts and Jobs Act of 2017.
Writing for the Heritage Foundation, two conservatives state that “repealing the state and local taxes cap would cost $673 billion over 10 years and primarily would benefit wealthy taxpayers at the expense of everyone else.” They claim that: “All the cap does is remove a subsidy that states with high property taxes used to hide the full weight of their taxes. Without the cap, property taxes could be raised to fund wasteful projects, and residents never would feel the full weight of the tax increase because they could write it off their federal taxes.”
“Wiping out the deduction is a good idea as a general principle, but it’s a very good idea in today’s environment since it would produce a lot of revenue to ‘offset’ the cost of lowering tax rates and making our awful tax system less onerous” says one libertarian. “Plus, the deduction is unfair and inconsistent with principles of good policy.”
Conservatives and libertarians are both aghast that every year or so, Congress reauthorizes some or all of a package of expiring tax provisions known as “tax extenders.” They both consider tax extenders to be subsidies that have to be paid for and bad tax policies that should be allowed to expire.
Time for a basic lesson on tax deductions and tax credits.
Tax deductions reduce one’s income subject to tax. Tax credits reduce the amount of income tax one owes. Either way, one will pay less in taxes the greater the number, and the greater the amount, of deductions and credits that he qualifies for. Eliminating or reducing the value of tax deductions or credits has the same effect as raising tax rates: more taxes paid to the government. Any attempt to eliminate or reduce tax deductions or credits should be seen as support for raising taxes.
Just as any decrease in taxes or tax rates is a good thing and any increase is a bad thing so any increase in tax deductions or credits is a good thing and any decrease is a bad thing. No matter whom it benefits, no matter why the government does it, no matter who lobbied for it, no matter who supports or doesn’t support it, no matter how temporary it might be, no matter how much it contributes to economic uncertainty, and no matter how much complexity it adds to the tax code.
Tax deductions and credits are always a good thing because they allow Americans to keep more of their money in their pockets, purses, and bank accounts and out of the filthy, greedy, profligate hands of Uncle Sam.
Tax deductions and credits are not loopholes that need to be closed or subsidies that the government provides. Economist Murray Rothbard referred to these ideas as great economic myths, and wrote in chapter 2 of his Making Economic Sense:
A deduction or exemption is only a “loophole” if you assume that the government owns 100% of everyone’s income and that allowing some of that income to remain untaxed constitutes an irritating “loophole.” Allowing someone to keep some of his own income is neither a loophole nor a subsidy.
Tax deductions and credits (as long as they are not refundable) mean that the government takes less of Americans’ money to fund its bureaucrats, agencies, departments, bureaus, military adventures, global empire, corporate welfare, subsidies, welfare programs, income redistribution schemes, and myriad of wasteful, inefficient, and unconstitutional programs that shouldn’t exist.
Since there is no chance that the income tax will be eliminated or that the tax rates will return to their initial 1-7 percent, we need more tax credits and loopholes.