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Our Most Corrupt Tax Breaks: 10 Loopholes to Close Right Now 

Wednesday, Oct 10 2012
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"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. Rep. Sander Levin (D-Mich.) has tried to shear this golden lamb by requiring those taking capital gains breaks to prove they actually invested. Yet Dave Camp, (R-Mich.), chairman of the House Ways and 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 the musicians providing the star power to their fundraisers. 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 playing politicians' rallies. Authors, for example, still must pay standard income taxes for selling their copyrights. 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 multi-billion-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 6 cents apiece. By law, Facebook was allowed to deduct the difference — over $7 billion — as a business expense.

In reality, the employee giveaway cost Facebook nothing, neither expanding the company's expenses nor increasing 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.

But at least Congress back in 1913 occasionally tried to do something beneficial to the country. Today's Washington is more interested in exploiting such beneficence.

Take the yacht deduction. The luxury sailing industry was able to buy its way into the mortgage break when Congress officially declared boats as homes. But not just any boat. The rules require they have sleeping quarters, a kitchen, and toilet, leaving just 3 percent of U.S. boat owners to qualify.

"The mortgage deduction was never targeted for that," says Rep. Tim Walz (D-Minn.). "It was meant to make homeownership more affordable for the middle class."

So Walz wrote the Ending Taxpayer Subsidies for Yachts Act, hoping to bar the über-wealthy from sponging off the mortgage deduction. Once again Rep. Camp refuses to let it come up for a vote.

That leaves everyday taxpayers to subsidize toys like Microsoft CEO Steve Ballmer's $200 million yacht, which comes equipped with an indoor pool, basketball court, and its own submarine.

"It's a loophole in the tax code that benefits a few people at the very top," says Walz, a sergeant major in the National Guard and former teacher. "I certainly feel if they want to grab their luxury liners, I'm glad they do. And I'm glad we have people making them. I'm just not certain we subsidize that."


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Chris Parker

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