Our Blog

porttitor felis sit amet

12 desembre, 2022

Why Do Tax Loopholes Exist

A loophole is a formality that allows a person or company to circumvent the scope of a law or restriction without directly violating the law. The loopholes often used in discussions about taxes and how to avoid them offer individuals and businesses the opportunity to withdraw income or assets from the taxable situation to those with lower or no taxes. Just before the delay ends, Congress is expected to close the most egregious loopholes, such as “tick the box,” “transfer pricing,” “active funding exception,” and “reversals” of companies. It should also close the loophole that allows businesses to deduct the cost of expenses related to moving jobs and operations abroad if the profits from those activities remain abroad and are not taxed by the U.S. – savings of $60 billion over 10 years. Many loopholes are unintentional, meaning they were not intended by the regulators or lawmakers who drafted the law. And those who use the loophole, even if the law allows it, always circumvent it because of a loophole in the legislation. Tax loopholes are provisions in the Tax Code that allow taxpayers to reduce their tax liability. These loopholes are often unintentional and stem from gaps in the legislation that were not evident when it was drafted. Many loopholes will be closed over time. But the tax code is so complex that things will always fall through the cracks.

A tax holiday was attempted in 2004 when $300 billion was repatriated at a tax rate of 5.25%, but it was a major failure. It neither increased domestic investment nor created jobs, and the money was mainly used for share buybacks, dividends and executive bonuses. What`s more, a tax holiday costs more than it brings in – it will lose $100 billion over 10 years. Even worse, it rewards companies that exploit offshore tax loopholes, encouraging even more tax evasion in the future. The largest deduction is paid for national and local taxes, with the highest concentration in the middle of the income scale. Not allowing this deduction would be taxing a tax on a tax or on mere phantom income, not on real, disposable income. We already impose too much double taxation. For example, if a person earns a monthly salary of $2000, about $400 can be deducted for federal income tax, plus $117 for Social Security tax, so they receive less than $1500 in net salary (minus any other possible deductions). But he is taxed at $2,000, which is $500 more than he actually receives. About 30 states do the same: they levy their taxes on gross income and do not take into account the fact that in the above case, the beneficiary receives only $1500 and not $2000.

Reducing the existing—and insufficient—federal deduction for state and local taxes would be a step in the wrong direction and make our tax system even more capricious and unfair than it already is. Not surprisingly, Congress has taken action several times to close income tax loopholes — in 1969, 1971, and again in 1975. What may be surprising is the fact that every time Congress passed a tax reform bill, the amount of income not taxed thereafter was higher than before, and the percentage of total personal income exempt from federal income tax, as well as the number of Americans who did not pay income tax, have increased significantly. In other words, whenever Congress tightened or closed certain loopholes – or claimed to have done so – it opened or widened others more and more completely. This strongly suggests that the real goal of closing loopholes is not so much to tax more tax-exempt personal income, but to shift the tax burden from some economic groups to others – to tax some lighter and some more. To be precise, the real objective of the campaign to close the loopholes is to redistribute income from a few less fortunate groups – presumably groups with fewer voting rights – to some with more votes and thus greater political appeal to incumbents and candidates. Some members of Congress have expressed concern that removing the expanded tax base would increase taxes for average taxpayers. But President Biden`s plan only affects the wealthiest taxpayers, as it includes a $1 million exemption and special protections that would add to several that already exist in the tax code. The huge untaxed income was first brought to the attention of the general public in 1955. The topic quickly gained attention and has been on the public agenda ever since. When Stanley Surrey, the most vocal spokesman for closing loopholes, became Assistant Secretary of the Treasury for Tax Policy in 1961 – and thus the nation`s top tax policy official – one might have expected vigorous action on tax reform. But neither President Kennedy nor President Johnson sent Mr.

Surrey`s most important recommendation to Congress. Overall, they recommended widening tax loopholes. Before leaving office after eight years, Surrey presented a comprehensive report on tax reform, particularly loopholes he called tax expenditures. He quickly began to gather dust because President Johnson was no more eager to open Pandora`s box than his successor.


2017 Ⓒ Apartaments els Arenys de Boí