Penny Wise and Pound Foolish: the Argument Against Closing All “Loopholes”

By Dale Glading | The Save Jersey Blog

obama_tax_hikesThere are a number of ideas being bandied about Capitol Hill these days for finding new ways to confiscate taxpayers’ money in order to feed our grossly overweight federal government. Some are bad and some are worse than bad.

In fact, they flat out stink.

Let’s be clear from the beginning: the federal government doesn’t have a revenue problem; it has a spending one.

Washington reminds me of someone trying to lose weight without reducing their caloric intake. It’s virtually impossible.

Yes, when it comes to consuming tax dollars, our federal government is morbidly obese and has no intention of changing its eating habits.

And so, it appears that the career politicians in Congress – aided and abetted by President Obama – are dead set on increasing the amount of money that flows into the federal coffers. As Mr. Obama has repeated ad nauseam, “Elections have consequences”, and the #1 consequence of the recent presidential election will be higher taxes for nearly everyone.

The only question that remains is if these across the board tax hikes will stand alone or be joined by the closing of certain tax loopholes. My best guess is that Congress will settle on a combination of the two.

But as damaging as tax hikes will be to a struggling economy, closing some of the aforementioned loopholes would be even more problematic.

First of all, the word “loopholes” is simply another way of saying “deductions.” Just like when Washington insiders use the term “increased revenues”, they really mean “higher taxes.”

They just don’t have the courage to say so.

True, some loopholes can be closed without incident and deserve to be done away with. But eliminating two such deductions – ones that are used by the majority of American families – would be nothing short of catastrophic.

The first deduction that is on the congressional chopping block is the write-off for mortgage interest.

Imagine the negative impact that reducing or eliminating this deduction would have on individual home owners and the housing industry – including realtors, construction companies, lumber yards, banks and other lending institutions.

The housing market is just now starting to emerge from a five-year tailspin. Ending mortgage interest deductions would almost certainly reverse that trend and stop the recovery in its tracks.

Even worse is the proposal to cap or eliminate the deductions for charitable contributions. Since nearly 40 million people claim this deduction on their tax returns every year, this would amount to a huge tax increase on about 13% of all Americans.

Sure, most people donate to charities out of the goodness of their hearts. However, it would be naïve to think that a tax write-off didn’t factor into the equation. In fact, studies show that write-offs affect both the size and the quantity of charitable gifts.

“It would be devastating,” says Jatrice Martel Gaiter, executive vice president for external affairs at Volunteers of America.

If charitable donations decrease in size or quantity, millions of Americans who currently receive valuable services through these charities will be negatively affected. Either they will have to do without these services – and risk falling through society’s cracks – or the federal government will have to step into the void it created.

Maybe that’s what Obama and his congressional co-conspirators are after. More centralized control by – and universal dependency on – Washington DC.

I have spent the past 30 years working in the non-profit sector; first as a department head at a continuing care retirement community and then as executive director of two different prison ministries. As such, I can attest first-hand that non-profit organizations provide far more “bang for the buck” than the federal government.

As a rule, non-profit organizations wring every ounce of productivity from their limited resources. And because they are closer to their clients, 501 (c) 3 charities also have a better feel for what they need and how best to deliver those services.

Equally important, non-profit organizations – especially smaller ones – are able to eliminate multiple layers of administrative overlap. That means less bureaucracy and more “boots on the ground”.

For these reasons and many more, Washington should resist the simplistic sound bite of closing all tax loopholes. To pull the plug on deductions for mortgage interest and charitable deductions would be penny wise but pound foolish.