Many years ago when I worked for Gov. Mike Leavitt we reviewed Utah’s tax system with top tax experts and made a long list of tax incentives, tax credits, tax deductions, etc., that had obviously outlived their original purpose and, in some cases, gave certain businesses or industries a competitive edge.
We endorsed the general principle that the best tax system utilizes a broad base with low rates. Loopholes narrow the base and push the tax burden to others.
Gov. Leavitt worked incredibly hard for several months, trying to convince interest groups and stakeholders, holding many meetings with numerous legislators, and engaging in a communications campaign to close these tax loopholes.
It was a tough legislative session. For every tax loophole an army of lobbyists and interest groups exist to protect it. Closing a tax loophole is a tax increase for those affected. Still, the Leavitt administration managed to win significant tax reform with several tax credits and incentives rescinded.
We thought it was a big victory, and it was. However, a funny thing happened. Over the next five or six years, almost all of those tax loopholes sneaked back into existence, perhaps in a somewhat altered form – most in the name of tax cuts. Despite an immense amount of work, it was almost impossible to kill those tax loopholes.
That’s why I’m highly skeptical that Congress can reform the national tax system to force wealthy people to pay higher taxes, even though I absolutely believe that wealthy people, especially multi-millionaires and billionaires, should pay their fair share of taxes.
Recently ProPublica released the (illegally stolen) tax returns of a bunch of wealthy people that revealed many of these billionaires paid very little income tax. That has caused a lot of outrage and provided impetus to the crusade of Pres. Biden, along with Democrats and liberal interest groups to tax the rich at higher rates, along with higher taxes for businesses. Biden claims he can fund a lot of his enormous spending priorities via such taxes.
The problem is, all the tax breaks for the ultra-wealthy, all those methods to avoid taxes, were approved by Congress at one time or another and are going to be incredibly difficult to change. Just raising rates won’t eliminate the loopholes.
For every credit and loophole, there is an army of lobbyists, industries and beneficiaries who will fight for it. That’s especially true with non-profits, many strongly supported by Democrats, that receive much of their revenue from wealthy people trying to avoid taxes.
Buy a Tesla, get a tax break. Install solar panels, get a tax break. Contribute to a charitable institution, get a tax break. Make certain equipment purchases, get a tax break. It’s all legal.
Many environmental groups and other really excellent non-profit organizations that do great work employ tax specialists who work exclusively with wealthy people and their foundations showing them how to avoid taxes while contributing to good causes.
In fact, a Wall Street Journal article pointed out that while ProPublica noted that billionaire George Soros “paid no federal income taxes three years in a row,” one of the reasons he paid no income taxes was that he contributed so much to liberal groups like ProPublica.
Under current tax law, wealthy people can donate shares they own in businesses to qualified non-profits and then pay very little income tax. There are dozens, maybe hundreds, of tax credits, incentives and deductions that wealthy people use to avoid paying taxes.
I’m not opposed to eliminating a lot of those tax loopholes. But I worry that the end result of federal tax reform will hit the moderately well-off people hard, those who can’t employ all the tax loopholes, and won’t touch the ultra-wealthy.
It’s far harder to effect meaningful tax reform at the federal level than the state level. The federal tax code is voluminous, convoluted and byzantine. Fixing one thing causes problems elsewhere. Wealthy people figure out ways around tax increases. The entire non-profit sector, which does important work all across the country, is entirely dependent on wealthy people avoiding taxes.
Good luck trying to raise taxes to generate the hundreds of billions of dollars needed to pay for Biden’s programs.