LOOPHOLES!

Much of the rhetoric this campaign circles around tax "loopholes" for the rich. Rarely in a speech is it actually said what these "loopholes" are. Most of the people in the audience don't know jack about taxes other than they copy down numbers from a W2 onto a 1040 and add, subtract, multiply and divide where the form tells them. They don't know a loophole from a posthole; the term "loophole" is often being used for the sole effect of implying that there is illegal activity going on.

Wikipedia describes a loophole as "an ambiguity in a system, such as a law or security, which can be used to circumvent or otherwise avoid the intent, implied or explicitly stated, of the system." 

The first thing to note about a loophole is that it is not a sign of illegality. Rather, it is a strict and literal adherence to legality (otherwise it's known as a "crime"). It means a law was written in such a way that strictly adhering to the letter of it leads to a consequence that was not intended by the lawmaker. For instance, my town has an ordinance requiring steps be built to exacting specifications for any entrance to a residence. This could be expensive for property owners when required even for entrances that aren't used. I once saw a landlord screw a sliding glass door shut and hang a sign on it reading, "this is a window". The intent of the law was code-compliant stairs at every working door. The result was one less working door. This is "exploiting a loophole".

The second thing to note is that many of the "loopholes" being talked about aren't even loopholes. They're intentional. For instance, a wealthy person pays a lower tax rate on income than a middle-class person. This isn't a loophole. This is because there is an intentional distinction in the tax law between "investment income" and "earned income". The government wants to encourage investment, so income from investments is taxed at a lower rate. Rich people are the ones with money to invest. Keep in mind that this money, if it just sat in a vault, would earn zero taxes for the government, because it would then be savings, not income! So the wealthy person invests his money, just as he's actively encouraged to do by the government, and then he's castigated by people (many of whom did the encouraging!) for "exploiting a loophole"!

So we hear scare stories that that the very wealthy (including President Obama, btw), pay a lower tax rate than their secretaries. Except, for the very wealthy, very little of their money comes from "earned income". Most of their money comes from investment income. If you're filthy rich you don't have to invest it. You can just put it in a vault, live off of it, and pay pretty much nothing for the rest of your life. We want that money in circulation where it can spur business and pay employees.

Getting that lower tax rate isn't shady business on the part of the investor... but crying about it is certainly shady business on the part of the politician. It's like raising the taxes on a carton of cigarettes to discourage smoking, then bitching at people who quit smoking "to avoid the tax". Or railing at people who put in solar panels because they get tax breaks for it. If you no longer want to encourage investments, then by all means raise those taxes, but don't blame investors for doing what you wanted them to do in the first place.

Of the ones that ARE actual loopholes, most rarely get talked about, because they're head-scratchingly complex. Like this one, reported in the Wall Street Journal.  In my opinion, the best way to close all manner of loopholes is to keep the tax code simple. All the myriad if-then clauses in the tax code add up to an incomprehensible mess that's relatively easily circumvented. Simple, unambiguous rules are harder to avoid.

Personally, I have no problem with pinning the minimum tax rate of the super-wealthy at something higher than what the middle-class pays for earned income. (It would be best to do this tax-raising when the economy is booming, though. Don't let class envy allow you to shoot down the economic recovery. Ask your local economist.)

But please, if you're in conversation with me, before you bandy about the scary L-word in scary all caps, make sure that what you're talking about is an actual loophole, or better yet, piss off. You getting upset about government-encouraged behavior simply makes you look foolish. And decrying the exploitation of loopholes as if it were a criminal act will get you limited sympathy; being limited to unemotional agreement that the loophole should be closed, with zero agreement whatsoever as to the moral or legal culpability of those who followed the letter of the law to its exacting conclusion. The Congress is full of lawyers; if they can't write a better law than this, vote them out. I already agree that loopholes (unintended consequences) should be closed, and you don't need to make yourself look silly to get my agreement on that non-argument.