The Ten Most Corrupt Tax Loopholes

If Mitt Romney won't tell you which need to be closed, we will.

Actually, it already has been destroyed. Despite declaring $18 billion in profits in 2010, Apple paid just 17 percent in federal taxes. It socked away another $74 billion offshore and tax-free.

Who covers the difference when Apple pretends to be Irish? That would be you.

9. How to lower your taxes by sitting on your ass.

Democratic U.S. Rep. Tim Walz (D-Minnesota) tried to pass legislation preventing the uber-rich from claiming the mortgage deduction on yachts. Dave Camp blocked that effort, too.
cursedthing/Creative Commons
Democratic U.S. Rep. Tim Walz (D-Minnesota) tried to pass legislation preventing the uber-rich from claiming the mortgage deduction on yachts. Dave Camp blocked that effort, too.

Back in the 1970s, "hard work" wasn't just something candidates yammered during campaigns. It was actually imbedded in the tax code. Capital gains — investment income created by things like stock dividends — were taxed at a higher rate than wage income for a very simple reason.

"The theory was that it was tougher to dig a ditch than to watch somebody do it," says Robert McIntyre, director of Citizens for Tax Justice.

Even Ronald Reagan knew that someone shouldn't pay less for sitting on his ass. He made the capital gains tax the same as the highest personal rate.

But heavy protection payments have since whittled that notion of "hard work" down to a toothpick. George W. Bush finally hacked it to its current low of just 15 percent.

Officially, the theory is that lowering capital gains will spur investment, creating new companies, new jobs, and prosperity for all. But most economists have found it does little to spur savings and investment.

What it does do is deliver a fortune to investment bankers and financiers like Romney and Warren Buffett, both of whom pay lower rates than their secretaries.

Over 70 percent of the $100 billion that capital gains tax breaks cost the government each year goes to those with incomes in excess of $1 million, according the Joint Committee on Taxation. Even more shocking, the 400 highest-income Americans received 16 percent of all net capital gains in 2009, a total of $37 billion.

Congressman Sander Levin (D-Michigan) has tried to shear this golden lamb by requiring those taking capital gains breaks to prove they actually invested. Yet Congressman Dave Camp, a Michigan Republican and chairman of the House Ways & Means Committee, has blocked the bill from ever coming up for a vote.

It's probably just coincidence that since Camp entered Congress in 1998, he's taken a whopping $631,916 from the financial industry. Camp did not respond to repeated interview requests.

8. The Sheryl Crow loophole.

It pays to have low friends in high places. Six years ago, legislators from Tennessee, Kentucky, and Texas wanted to reward those who provide the star power to their fundraisers: country musicians. So they passed a law allowing songwriters to avoid income taxes and sell their publishing catalogs at capital gains rates.

Suddenly, Nashville's elite could not only avoid the taxes everyone else must pay; they could also skirt their Social Security and Medicare bills.

Three years later, Sheryl Crow sold her publishing rights to one of Australia's largest banks for nearly $10 million. Her estimated savings courtesy of this congressional giveaway: $2 million.

The law, however, curiously omitted other creative types who weren't hosting congressmen's rallies. Authors, for example, still must pay standard income taxes for selling the copyrights to their books. The same goes for painters, photographers, screenwriters and sculptors.

7. Getting rich, Facebook style.

Before Facebook offered its first publicly sold stock in May, CEO Mark Zuckerberg grabbed 120 million shares for himself, then threw another 67 million shares to his employees.

It may have seemed an unusual act of generosity for a man not known for his grace. That's because it was also a multibillion dollar tax scam.

The public paid $38 a share for Facebook stock in initial trading. Yet via a sweet little loophole created by Congress, Zuckerberg claimed the shares he gave employees were worth just six cents a piece. By law, Facebook was allowed to deduct the difference — over $7 billion — as a business expense.

In reality, the employee giveaway cost Facebook nothing. It neither expanded the company's expenses nor increased its liabilities. McIntyre compares it to an airline letting workers fly free in seats that would otherwise have been empty. The airlines don't receive a break because it doesn't cost them anything.

But thanks to some inventive paper shuffling, Facebook will receive a $500 million tax refund next year.

A similar loophole encourages companies to offer executives those bloated compensation packages.

When CEO wages began to spur outrage in the early Clinton years, Congress decided that companies could no longer deduct executive salaries over $1 million as a business expense.

But it also created a loophole that rendered its crackdown meaningless. Exempted were "performance-based" bonuses that surpass that $1 million threshold. A grand new corporate giveaway was born.

Suddenly, CEOs were being slathered with stock options. Companies expensed the giveaway without ever opening their wallets, leaving taxpayers to subsidize caviar compensation plans.

Last year, the five highest-paid CEOs collectively took home $232 million — while their companies received a tidy $81 million in tax breaks.

6. My other home's a yacht.

Established in 1913, the mortgage interest deduction is one of the oldest and most sacred breaks in the code. It's meant to encourage home ownership and stabilize communities.

It doesn't really work, since most people will buy homes whether they receive a break or not. Countries like Australia and Canada have similar ownership rates to ours without offering the deduction.

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4 comments
FattyFatBastard
FattyFatBastard topcommenter

tl;dr

 

I will say it is interesting that the flat tax - by and far the best answer out there for true tax reform, is always poo pooed away by the liberals.  It would take all loopholes away in one flail swoop.

H_e_x
H_e_x

 @FattyFatBastard Except when Jerry Brown advocated it in his 1992 presidential run.

But I don't think that raising taxes on the poor and lowering for the rich will solve anything.

FattyFatBastard
FattyFatBastard topcommenter

 @H_e_x The flat tax does nothing to the poor.  And the rich?  Wasn't this article about the rich exploiting loopholes?  I'm not going into further detail on this because it isn't worth my time and I'll change nobody's mind.  But if you want a dramatic tax change that is visible to all, the flat tax is it.

 
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