The Language of Loopholes

As noted frequently around these parts, one of the most disappointing habits of the Republicans is their adoption of Democratic lingo in policy debates.  It is especially frustrating when the tactic (1) debases language to (2) obscure the true nature of the topic being debated (3) in a manner that tilts the field in favor of liberal solutions.  It’s obvious why Democrats want to engage in these evasions, less so why the GOP follows along.

The most egregious example of the day is “loophole.”  According to the good folks at Merriam-Webster, a loophole is an “ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be avoided.”  Couldn’t have put it better myself.

In Democrat-speak, on the other hand, a loophole is any mechanism that reduces taxes, including the myriad provisions of the Internal Revenue Code that reduce taxes strictly in accordance with Congressional design.  Redefining these provisions as loopholes, as if Congress accidentally allows homeowners to deduct mortgage interest, is absurd.

Republican House Speaker Boehner weighed in yesterday with a classic of the genre:  “It’s clear that there are a lot of special-interest loopholes in the tax code, both corporate and personal.  It’s also clear that there are all kinds of deductions, some of which make sense; others don’t.”

Hmm.  So there is a difference between a “loophole” and a “deduction.”  Perhaps the good Speaker can identify what exactly the difference is, for the benefit of me and all the other working tax lawyers out there.  In reality, the tax code contains three mechanisms for reducing taxes.  Exclusions exempt certain types of income from being subject to tax at all.  Deductions are expenditures that reduce the amount of income subject to tax.  Tax credits reduce tax liability dollar for dollar.

None of these can be fairly characterized as loopholes, not if words have any meaning.  By definition, if it’s in the tax code it’s not a loophole.  Calling these provisions loopholes is a lie that allows politicians to hike taxes under the guise of fixing mistakes.

Contra Speaker Boehner, “special interests” don’t add provisions to the tax code, Congress does.  If there’s an exclusion, deduction or tax credit in there that benefits a particular industry, you can bet it was paid for with campaign contributions.  In point of fact, none of the “revenue enhancements” that are reported to be under consideration are loopholes – they are snuggled nice and cozy right there in the Internal Revenue Code:

  • Charitable contribution deduction – IRC section 170
  • Home mortgage interest deduction – IRC section 163(a), (h)
  • Municipal bond interest exclusion – IRC section 103
  • Deduction of state and local taxes – IRC section 164
  • Exclusion of inside buildup on life insurance policies – IRC section 101
  • Contributions to retirement plans – IRC section 404
  • Exclusion of value of employer provided health care – IRC sections 79, 106

The only item on the tax agenda that may be plausibly described as a loophole is the treatment of carried interest distributions to investment fund managers, and even that one is a stretch.  Numerous provisions of the Internal Revenue Code deal with characterization of partnership distributions and none of them address the matter.  The fact that fund managers have taken the position that carried interest distributions of long-term capital gains retain their character when paid to them is hardly unknown to the IRS – it has been debated for decades.  If the practice consisted of taking advantage of some inadvertent drafting in the Code, you can bet it would have been fixed years ago.

The Republican leadership could do themselves, the country, and the English language a great benefit by simply announcing that they preemptively agree to close any actual loophole Obama cares to identify.  There simply aren’t any.  And let all the other tax hikes be called by their proper name.

About Conrad

Conrad O'Connor is the nom de web of a tax lawyer working in Atlanta, Georgia.
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