Millions of Americans are losing money to tax loopholes that do not apply to them. In fact, the current tax code gives loopholes a favorable treatment. For example, investors can pay a lower rate on capital gains than on earned income. This unfair advantage can lead to significant tax losses. The best solution is to align the tax rates for dividends and capital gains so that they match. Loopholes cost the country $1.3 trillion over ten years.
In addition to the harm that these loopholes do to our economy, they are costly for our country. Currently, the federal government loses $30 billion every year, not including billions lost by provincial and territorial governments. This money could help us fund universal pharmacare, improve long-term care, and other important public services. Instead, corporations are benefiting from these loopholes. However, a recent poll by Small Business Majority shows that 92 percent of small businesses agree that these tax loopholes are a problem. In addition, three-quarters of small businesses say that these loopholes damage their business.
Ultimately, closing tax loopholes will lead to increased revenue. Close tax loopholes can benefit all Americans. One example is the automobile industry. The tax-break encourages mortgage lending, which ultimately fueled the economic downturn. However, the tax breaks only benefit big Wall Street banks and disproportionately benefit one segment of society. However, by reducing one loophole, another will follow and ask for an exemption. A successful reform plan should treat everyone fairly. Providing an exemption for one industry will only lead to further discrimination.
Another example is the closing of the Salem, Virginia plant of General Electric. Workers were displaced to a $200 million factory in India because of cheaper competition from foreign companies. However, by investing in India, the company can claim $20 million in profits tax-free there. This helps American corporations compete on a global level. But if the tax loophole is closed, then American corporations will be in a much better position. There are many reasons for this, and one of them is the possibility of higher revenue.
The income tax loophole enables the wealthy to avoid paying capital gains taxes on their assets. By holding assets until death, these individuals do not pay any taxes on those assets. Closing this loophole would raise $650 billion over ten years. Specialized trusts also help families avoid gift and estate taxes. And finally, the tax breaks that do exist in the current tax code allow the wealthy to create a private tax system.
The existing rules create two types of taxpayers. High-earning individuals and entrepreneurs have few ways to avoid paying the top marginal rate of 37%. Many of these individuals live in states with marginal rates of 50 percent or higher. The IRS’s most obvious solution is to increase enforcement of the tax code. That will result in more revenue. You’d be surprised how many Americans are paying too much tax. You won’t believe the number of people who make over $100k in the past three years.