Closing Loopholes — Easier Said Than Done: Daily Austerity Watch

Loopholes, like beauty, are in the eye of the beholder.

Whether ’tis nobler to give a leg-up to large corporations or individual taxpayers is a subject of endless debate among business executives, politicians and economists debating about the best way to solve the nation’s debt problem.   Democrats, as everyone knows, favor raising taxes on the wealthy and eliminating tax breaks for oil companies.  Republicans say they are adamantly opposed to raising taxes at any time, particularly as the economy continues to falter as politicians scramble to increase the debt limit in Congress.  That job became more difficult after the defection of Sen. Tom Coburn (R-OK) from the Gang of Six, which is attempting to craft a bipartisan debt deal.

The stakes are high.  According to IRS data,  the average refund given to taxpayers as of May 7 was $2,811, down 2.5% from a year earlier.   While not a princely sum, it is enough to make a difference in the budgets of low- and middle-income taxpayers.  Figuring a way to close tax breaks and reduce the deficit while at the same time not affect the progress of the economic recovery.   It won’t be easy.

The real estate industry is fighting efforts to either cap or cut the mortgage interest deduction would have disastrous consequences.   Both the Obama administration and the President’s bipartisan Deficit Reduction Commission called for the popular deduction to be scaled back.   Obama estimated that his plan to restrict the ability of wealthy taxpayers to claim the popular deduction would have saved $208 billion over the next decade.  He recently mentioned it again during his recent budget address.  The Tax Policy Center argued that the plan would have caused housing prices in urban areas to plunge.

“The average homeowner deducts more than $10,000 in mortgage interest, according to tax publisher CCH,” USA Today says.  “For a taxpayer in the 25% tax bracket, that results in a tax savings of $2,500. The mortgage interest deduction also helps homeowners cross the threshold to make itemizing worthwhile, so they can also deduct charitable contributions, state income taxes and other expenses.”

Democrats are targeting the oil industry to solve the debt problem.  That idea, however, went nowhere.  The U.S.  Senate blocked a plan backed by the party that would have repealed about $2 billion in tax breaks for the five biggest oil companies.   Oil industry executives and Republicans argue that raising taxes on their industry would do little to lower the price of gasoline.  Senator Claire McCaskell (D-MO) has called for an investigation into possible market manipulation, a claim the American Petroleum Institute claimed was ludicrous.

“The Federal Trade Commission was already closely monitoring gasoline prices, and no evidence has surfaced to suggest supply and demand aren’t the primary forces driving them,” says John Felmy, API’s Chief Economist, in a press release.

One man’s loophole surely is another person’s lifeline.

–Jonathan Berr