by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Hidden in the tax code, however, is another potential source of federal spending. So-called tax expenditures are the exclusions, exemptions, deductions, credits, preferential rates, and tax deferrals that infest individual and corporate income-tax laws.
These are the loopholes denounced in campaigns, yet cherished and increased after candidates settle into high office. Most are as popular as they are expensive.
Consider just the 10 biggest loopholes, as projected for their value in the coming fiscal year that starts on Oct. 1:
• Employer contributions for medical-care and medical-insurance premiums aren’t taxed for the employees who benefit. This deletes $235 billion a year in federal taxes.
• Lower rates and preferred treatment for individuals’ capital gains: $210 billion.
• Taxes are deferred on employers’ contributions to pensions and retirement saving plans and on investment earnings in the plans: $140 billion a year.
• Homeowners are not taxed on the value of living in their homes without paying rent to themselves, which would be income in their role as landlords. Though obscure and arguable, even among economists, this is worth $112 billion a year.
• Deferral of income from corporate business activity abroad until the income is brought to the U.S.: worth another $112 billion a year.
• Mortgage interest is deductible on owner-occupied residences: $68 billion.
• Earned-income tax credit, which subsidizes low-wage workers: $63 billion.
• Deductibility of nonbusiness property taxes and some other state and local taxes: $63 billion.
• Deductibility of charitable contributions: $62 billion.
• Accelerated depreciation of business machinery and equipment: $50 billion.
The total of all loopholes is $1.1 trillion of taxes that the government would collect from the nominal tax system. Beyond the top 10 are nearly 200 other loopholes worth more than $400 billion.
As the National Taxpayer Advocate, Nina E. Olson, said last month, “Congress now spends more money each year through the tax code than it spends through the appropriations process.”