Loopholes are Loopy: Why I don't like tax exemptions

Today House Speaker Paul Ryan proposed a major tax overhaul, including the elimination of some exemptions. Senator Flake has also recently suggested that we get rid of loopholes in the tax code. I think these are good ideas.

What’s wrong with a complex tax code?

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What is wrong with loopholes? There could be some benefits and costs for a specific loophole that end up cancelling each other out. For example, a tax credit for homebuyers could have the benefit of encouraging people to settle down, which strengthens a community. On the other hand, that same tax credit may hurt companies that rent housing or be given as a corrupt way to get campaign financing from some home builders.

Here is a cost of loopholes that applies to all loopholes: the cost of finding and using the loopholes! Every complexity in the tax code represents work that people are putting into using that complexity. Of course, a given person uses a tax code complexity because they will at least barely benefit from that use. But there is a way in which everybody is hurt by using the complexity.

Imagine a simple situation in which we all pay a 20% tax, and that is just enough to fund the government. Now let’s say we are going to give everybody with a home (half the taxpayers, for this example) a 1% reduction in what they need to pay, given that they fill out a form that takes 10 minutes to fill out and 10 minutes for the government to review. Well now we need to increase the default tax rate to 20.5% so that homeowners pay 19.5% and everybody else pays 20.5%. So overall society still has the same amount of taxes that need paid, and additionally 20 minutes per homeowning taxpayer are used up.

This is the case for all tax complexities: the amount of money needed by the government stays the same, but more work is needed for taxpayers and tax collectors to use the complexities for personal benefit. Hence there is a net loss in time and resources that society can use.

Of course, as a future lawyer, I receive extra personal benefits from complexities in the law, so for whatever complexities must remain, I hope you’ll pay me to help you with them ; )

A similar cost comes from finding exceptions to God’s laws. The time we spend rationalizing does not reduce the compliance to commandments that is needed to receive God’s blessings, and so it is time wasted.

Exceptions that that are specifically outlined by God or his prophets are obviously good, or exceptions that we prayerfully determine are appropriate for our situation. But I personally spend much more time than I would like on deciding whether the “happiness of [my] spouse is more important than [my] own pleasure,” should I refrain from reprimanding a boy scout while I still feel angry, and should I turn to the Lord and humble myself. I have learned time after time that the answer to these questions is yes, and so I would like to stop looking for exceptions.

Let’s not waste time with a complex tax or with spiritual matters. If we get rid of some exemptions in the tax code then administering the tax code will be cheaper. If we stop looking for exceptions to spiritual principles when we know that we won’t find valid ones, then we save energy for better pursuits.