Hamill: Are tax loopholes designed defenses or abusive escapes?

Michael Kinsley once said, “The scandal isn’t what is illegal, the scandal is what is legal.” Let’s apply this to the tax laws.

It is often said that the rich take advantage of loopholes to avoid paying their fair share of taxes. Tax professionals are co-conspirators in this process.

So, what is a loophole? It is a slit found in a castle wall to be used by archers to shoot at those who might mean harm to the castle inhabitants.

The Middle English word “loupe” means narrow window or slit opening in a wall. Add “hole” to “loupe” and you get loophole.

By shooting through this narrow slit, the archers can remain protected by the castle walls.

Similar slits were built into the walls of forts in our country. The fort’s defenders would shoot with rifles rather than an archer’s bow.

These loopholes were fully intended. So, too, are the loopholes built into the tax system. They protect the users from attack.

If there is a scandal with the use of tax loopholes, it is because they are legal. Users simply take advantage of the protections offered by the Congress.

The word “loophole,” derived as explained above, later became used to describe a form of escape. This is how we use the word today.

Those who understand the derivation of our tax laws instead use “abuse” to refer to misuse of a statutory tax provision.

The Treasury Department may write regulations, or administrative guidance, to combat these abuses.

When taxpayers and their advisers take advantage of loopholes, they should be celebrated for their wisdom in use of the design of the castle walls.

When these same people cross the line to abuse the intended purpose of the law, we need adequate means to cut off their form of escape.

Let’s look at an example. Section 199A of the tax law allows a 20% deduction for “qualified business income.”

This deduction applies to noncorporate taxpayers and was seemingly intended to mirror the tax rate reductions made available to corporations in the 2017 law.

I say “seemingly” because the 2017 law was literally thrown together with little explanation of its intent.

This qualified business income deduction provides much more benefit to high-income people than others.

Forty percent of the benefits go to those with an adjusted gross income of $1 million or more.

The distributional effects of the deduction have led to calls for repeal of this provision. It is called a loophole for the rich.

But, again, it was intended. Perhaps not well thought out but nonetheless designed and approved by the Congress.

If it is scandalous then everyone could petition their Congressperson and call for its repeal.

It dies at the end of this year with much of the 2017 law. If the 2017 law is extended, citizens could ask that Section 199A not be part of that.

I have opinions about this special deduction, but I am a team player. We have a process to debate tax legislation and if Congress extends the loophole, so be it.

To restate, abuse is not intended by the law. They are not the loopholes that drafters intended to build into the castle walls.

The Treasury Department is aware of the abuses. They have asked for more IRS agents to go after these abuses.

They expect support for regulations and other administrative guidance to combat the abuse.

Treasury seems to be losing these battles. We have met the enemy, and he is us.

I really don’t understand this.

To overstate my case, I do understand the creation and use of loopholes. Whether I like them or not, loopholes follow our long-standing legislative processes.

Citizens have a voice in these processes. If the laws don’t comport with my beliefs, at least I respect that the proper process was followed. I then respect the law.

Abusers do not respect our laws. They are prevalent and they are currently winning the battles with the government.

Bob Dylan, in his song “Idiot Wind,” said “In the final end he won the war, after losing every battle.” I hope our Idiot Wind changes course, and we can ultimately win the tax war.