What is a tax loophole?

What is a Tax Loophole?

As the popular phrase goes: “Two things are certain in life, death and taxes.” While there is truth to the death part, as for the part about taxes, not so much. The upper class has consistently taken advantage of inadequacies in our tax rules and laws, otherwise known as tax loopholes, where they can get out of paying the amount of money they should be paying. There are many instances in which tax loopholes are used to avoid paying the proper amount of taxes, while everyone else continues to pay their designated rates. Because it is usually the wealthy who take advantage, the middle and lower classes feel the pinch. 

Tax deductions are how individuals and businesses avoid paying a tax. A deduction is money taken off of your tax bill because you or your actions have met certain criteria. Deductions are a good thing for two reasons. First, it helps people who are struggling to make ends meet. If you are in a lower income bracket and meet some qualifications such as having kids, a specific type of job, or something of that nature, a tax deduction would leave more money in your pocket and could be the difference between bankruptcy and paying the bills. Second, it stimulates the economy. The more money you keep from taxes, the more money that you would spend. When consumers spend money, it is a good thing for American businesses, as more revenue means more growth. While this sounds great, there are deductions that are taken advantage of by the wealthy to get abundant tax breaks, making them into a loophole. What is the line we draw between deductions and loopholes? Tax deductions help a lot of people, but when they are taken advantage of, they have the ability to hurt a lot of people. A deduction is typically paired with another law, which creates a scenario where someone is able to abuse a deduction and turn it into a loophole. The government still needs a certain amount of money to maintain the country’s budgets, but what happens when billions of dollars of revenue is lost due to the tax loopholes? The answer is that someone else, or the average citizen, will make up the difference.

The article “AU Advises Internal Revenue Service To Close Voucher Funding Loophole In Tax Code” goes into a very deep description about  one instance of a deductible turning into a loophole. This specific law, valid in some states, is an excellent example of a detrimental deduction that has transformed into a loophole with negative consequences. In this situation, a wealthy donor can donate to schools and receive the money back in tax returns. Let’s say, for example, a wealthy individual donates 1 million dollars to a private school district. In some places in the United States, you would receive massive percentages of that money back from your deductible. A lot of places give back one hundred percent of the money you donated. This specific deductible falls under the “Social Policy Deduction,” which is money that is given back in return for donating to better cultural, educational, religious, or welfare organizations or activities. This is also seen as a “charitable donation.” According to another rule, after our wealthy individual receives his 1 million dollars back, he will also receive a percentage of the 1 million back as an Economic Policy deduction. What this means is, our charitable wealthy individual has received his 1 million dollars back, and received (let’s say a 30 percent deductible for this scenario) on top of the 1 million he already saw returned, and took 300 thousand additional dollars off of his taxes as profit, for completely free. This may not seem like such a terrible thing on the surface, but for the local community, it absolutely is. 

The government takes taxes from everyone else in the area to fund public schools, public parks, homeless shelters, and other public services. It collects a finite amount of money, and there is not an unlimited amount waiting to be used. If the government gives one point three million dollars back to this very rich investor, let us consider where that money comes from and ends up. The money returned back to the investor was originally collected as taxpayer revenue, from the rest of the community. Upon giving 1.3 million back to the donor, that is 1.3 million that cannot be spent on public works projects. 1 million is already tied up making the wealthy’s rich private school even wealthier, siphoning revenue that should be going somewhere such as the already severely underfunded public school system. That three hundred thousand dollar gift could also be spent on people who desperately need it,  but is used as a catalyst to make the rich richer and the poor poorer. The real issue here is that the IRS is completely aware of this situation, and has done nothing about it. They are completely underfunded and do not have the resources to respond to this situation.

To conclude, at some point a tax deductible, designed to stimulate the economy and strengthen the bank accounts of our citizens, becomes a loophole that does the exact opposite of its original purpose. Through Congress, as stated by “Tax Loopholes, a Procedural Proposal,” is the only way that we can get deductions completely eliminated. There always seems to be a cry out in Congressional meetings that tax loopholes must be closed. However, they all end with the same result: absolutely nothing happens. Congress still views deductions as necessary with complete validity. However, they choose to simply ignore the greater issue at hand, of the wealthy taking advantage of these circumstances. Congress is very likely influenced by the wealthy themselves and has definitely contributed to the issue themselves. If Congress is going to be little help, who else can we, the people, turn to? The people need an organized group that can lead us towards some kind of solution. This solution is the Internal Revenue Service. The IRS is the only major body of government that is capable and will actually attempt to attack tax loopholes, or apply pressure for some sort of legislative change. The issue is that they are severely underfunded and lack the resources to do so. Increasing the resources of the IRS is the most likely option to lead to a solution and is attainable.