Updated: February 17, 2013 6:27AM
Sen. Dick Durbin of Illinois recently appeared on CNN to voice his support for increasing government revenue by getting rid of various loopholes that allow individuals and companies to avoid paying taxes. His pandering to the voters led him to present an erroneous picture of what such “loopholes” consist of, and gives such an effort zero chance of succeeding.
Durbin correctly noted that the total amount of “tax expenditures” in the internal revenue code — that is, the various deductions, credits and exclusions that taxpayers can avail themselves of to reduce their tax bill — add up to over $1 trillion per year. In his next breath, however, he announces that some of those — most notably the mortgage interest deduction, deduction for state and local taxes and deductions for charitable giving — are “near and dear to us” and are off the table.
Durbin’s sleight of hand is that he fails to acknowledge that these three provisions — or “loopholes” in his parlance — are the three of the most expensive tax expenditures that we have; they add up to nearly $200 billion a year. If these are untouchable, what does he have in mind?
Perhaps the senator is thinking about trying to reduce the tax break for employer-provided health insurance, which costs our government $200 billion? Probably not, since he opposed attempts to reduce the tax break for “gold-plated” health insurance plans when it became part of the Affordable Care Act in 2010.
Does he want to get rid of the tax breaks for 401(k) contributions, or reimpose a capital gains tax on the sale of a home? Those two add up to another $100 billion a year. I suspect not, but by all means, let’s ask him.
On the corporate side, he alluded to targeting “offshore” income, so perhaps he is thinking about getting rid of a provision known as deferral. As it stands, U.S. companies that do business abroad must not only pay taxes to the countries where they do business but also pay U.S. taxes on those profits, putting them at a competitive disadvantage with businesses based in countries that do not double-tax foreign-sourced profits. To partially fix this problem we allow U.S. companies to “defer” U.S. taxes until that money is brought back into the country.
Abolishing deferral would raise nearly $50 billion a year, most of which would be borne by companies that export and have substantial foreign operations — and by their workers as well. While President Barack Obama has long championed abolishing deferral, Durbin has been careful not to, since the state of Illinois has more than its share of such businesses.
The handful of provisions listed here that Durbin has taken off the table comprise more than half of all tax expenditures. None of them should be sacrosanct: Tax economists of all political stripes have made arguments for reducing the cost of these tax expenditures in a way that would not seriously impact the middle class while generating more revenue to either reform the tax code, reduce the deficit or improve our infrastructure. But if these provisions can’t be touched it’s absurd to think that any politician is going to go to the mat to get rid of the myriad of other deductions out there. There is no free lunch in the world of tax “loopholes.”
Durbin can pretend that the “loopholes” out there are painless provisions that don’t affect us, but the reality is that cutting back on any of them will involve making some hard choices about what our society wants to prioritize. Durbin’s comments make it clear he is not at all prepared to begin that conversation. Too bad for us.
Ike Brannon is director of research at the R Street Institute, a Washington-based conservative think tank.