Income Tax “Loopholes” and Political Rhetoric

When used by newspaper reporters and politicians, the term “tax loophole” is always a pejorative, though the tone of disapproval may be mingled with a dash of admiration for the astute lawyer or accountant who discovered the device. Since condemnation is the predominant tone, it is always assumed that loopholes can be quickly and reliably distinguished from tax provisions that are reasonable and fair. Sometimes, to be sure, it is suggested that the only criterion is self-interest: one man’s loophole is another man’s relief provision. More frequently, loopholes are said to inure primarily, if not solely, to the benefit of the rich, either because high-priced experts must be employed to devise loophole-exploiting transactions or because it takes capital to consummate the plan after a tax-free route has been discovered. Finally, it is often thought that tax loopholes entail an enormous loss of potential governmental revenue, and that their eradication would either permit everyone else’s taxes to be reduced or provide the funds for social welfare programs of great magnitude. Each of these issues deserves scrutiny.