The budget fight in Washington, which entered a new round last week as Senate Democrats and House Republicans introduced dueling plans, is usually cast as a contest between raising taxes and cutting spending. In fact, the taxes-versus-spending distinction is largely meaningless.
Each year, the government doles out tax breaks worth $1.1 trillion. That is more than the cost of Medicare and Medicaid combined. It is more than Social Security. It tops the defense budget, and it tops the budget for nondefense discretionary programs, which include most everything else.
Tax breaks work like spending. Giving a deduction for certain activities, like homeownership or retirement savings, is the same as writing a government check to subsidize those activities. Functionally, they mimic entitlements. Like Medicare, Medicaid and Social Security, they are available, year in and year out, in full, to all who qualify. Yet in budget talks, Republicans ignore tax entitlements, which flow mostly to high-income taxpayers, while pushing to cut Medicare, Medicaid and Social Security.
President Obama and Congressional Democrats have rightly asserted that tax breaks are ripe for cuts that could raise revenue without hurting most taxpayers. One method, as presented in the Senate Democratic plan, is to convert tax deductions, which increase in value as income rises, to tax credits, which would provide benefits more broadly and evenly among low-, middle- and high-income households.
Tax deductions, however, are only one kind of tax break. Many others take the form of arrangements that allow wealthy taxpayers to either escape tax entirely on specific transactions or to defer it indefinitely.
Democratic budget proposals have targeted some tax shelters. They all bear scrutiny. Especially now, when solutions are needed to replace the automatic budget cuts, many tactics are indefensible and should be ended, including:
CARRIED INTEREST This loophole lets private equity partners pay tax on most of their income at a top rate of 20 percent, versus a top rate of 39.6 percent for other high-income professionals. It drains the Treasury of $13.4 billion a decade, and should be closed, along with a shelter recently enacted in Puerto Rico that would help shield the income of individuals whose taxes would rise if the carried-interest tax break was eliminated.
NINE-FIGURE I.R.A.'S Remember Mitt Romney's $100 million I.R.A? Private equity partners apparently build up vast tax-deferred accounts by claiming that the equity interests transferred to such accounts from, say, their firms' buyout targets are not worth much. No one knows how much tax is avoided this way. What is known is that I.R.A.'s are meant to help build retirement nest eggs, not to help amass huge estates to pass on to heirs.
'LIKE KIND' EXCHANGES As reported in The Times by David Kocieniewski, this tax break was enacted some 90 years ago to help farmers sell land and horses without owing tax, as long as they used the proceeds to buy new farm assets. Today, it is used by wealthy individuals and big companies to avoid tax on the sale of art, vacation homes, rental properties, oil wells, commercial real estate and thoroughbred horses, among other transactions. Government estimates say this costs about $3 billion a year, but industry data suggest the amount could be far higher.
The list goes on. American multinationals, insurance companies and so-called S corporations are tax avoidance machines. What remains of the estate tax is beset with tax dodges. Even golf courses are entitled to a special tax break of their own: some $50 million a year is granted to owners who donate golf courses to conservation trusts, ostensibly to benefit the public — though the public good in private courses is dubious.
In this time of ill-advised budget cuts, there are surely better ways to spend that money. For $50 million, 6,000 children could attend Head Start next year.
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