What You Won't Hear in the Presidential Debates: Both Parties Love to Hate, Hate to Close Tax Loopholes

Presidential candidate Mitt Romney has been widely criticized for proposing very specific—and very large—tax cuts, while remaining vexingly vague about which tax loopholes he would close to offset their costs. Romney proposes to extend the Bush tax cuts (which would be deficit-financed) and then enact several new tax cuts, including reducing income tax rates by one fifth. The cost of the new tax cuts, as his logic goes, would be offset by cracking down on loopholes (tax expenditures, if you want to use the technical term).

Romney has vaguely claimed that because rich people would lose at least as much under his plan (because of the loss of tax expenditures like tax deductions, tax credits and other special breaks) as they would gain (from the reductions in tax rates and other new tax cuts), that there would be no net tax cut for the rich.

---

But what he claims is mathematically impossible.

We calculated that people making more than $1 million in 2013 would enjoy an average net tax cut of $250,000 under Romney’s plan, even if they had to give up all of the tax expenditures that Romney has put on the table (and of course he’s kept expenditures that most benefit the rich very much off the table). But for low- and middle-income taxpayers in Romney’s plan, the loss of expenditures could end up outweighing any gains from their tax rate reductions and other new tax cuts, resulting in a net tax increase. In fact, this is the only possible result if Romney is to accomplish his stated goal of not further increasing the deficit.

So the main reason Romney doesn’t spell out the details of his plan is that he can’t. It is impossible for any detailed version of his plan to please all the interests he is courting—investors who want to keep special, low rate for capital gains, middle-income people who don’t want to give up tax breaks for home mortgages and health care (just to pay for more tax cuts for the rich), and deficit-hawks who think the budget deficit must be restrained no matter what.

This fear of offending various interests, however, is not limited to the Republican candidate this year. It also prevents Democrats from specifying what tax loopholes should be closed. Just look at President Obama’s approach to corporate tax reform.

In February, the Obama administration released a “framework” for corporate tax reform that would “eliminate dozens of tax loopholes and subsidies” for corporations and use the revenue savings to pay for a reduction in the official corporate tax rate, from 35 percent down to 28 percent.

It might seem odd, given concerns over the budget deficit, to propose closing corporate tax loopholes only to throw the money saved right back at corporations (by reducing their tax rate). But that’s just part of the problem.

What’s really weird is that the President takes advice from GE’s Jeffrey Immelt—GE being a legendary tax dodger—then holds up Boeing—a company that has paid nothing in federal corporate taxes over a decade—as the sort of corporation that deserves a lower tax rate. Obama told a crowd at a Boeing plant in Washington State that corporate tax loopholes should be closed and the revenue “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.”

But like Romney on the personal tax side, President Obama can’t bring himself to name all the corporate tax loopholes that should be closed. That would threaten powerful interests—like Boeing. His “framework,” therefore, only specifies enough loophole-closing to offset just one-fourth of the cost his proposed cut to the corporate tax rate. The document mostly just points to possible reforms, like ending “depreciation,” which is how companies gradually deduct the cost of business assets over time and the major reason companies like GE and Boeing are able to avoid taxes.

But, it’s hard to see how lawmakers in Congress can ever overcome the lobbying clout of huge corporations without leadership from the president, any more than they could deny the many interest groups lobbying to hang on to their favorite personal tax breaks. The last time the country saw real tax reform and loopholes closed, it was under a president who took the lead. That was in 1986.

Whichever candidate wins the White House this year needs to be similarly committed to reform that generates the revenues the country clearly needs. If they aren’t, then we the people will need to demand it from them.

This is the third in a series of essays provoking a conversation around the invisible issues of Election 2012—those crucial topics that will hide in plain sight as the two candidates square off during the presidential debates this month.

One/Two

Photo via Flicker (cc) user Ed Bolton.