There will undoubtedly be a lot of talk this year on the campaign trail about closing tax loopholes as a way to help fix the federal budget. What are tax loopholes? And how easy will they be to close? N.C. State University economist Mike Walden weighs in.
“Tax loopholes are simply allowable, legal tax deductions and credits that are in the tax code. People using them are able to reduce their taxes paid. These are perfectly legal. And so if they are to be removed or reduced, what will happen is taxable income for many … businesses and households (will go up). … They’ll pay more taxes, and tax receipts to the government will go up.
“Now the biggest loopholes are actually, I think, for things that many people would say, ‘Yeah, there’s probably there probably should be a deduction or credit for that’ — for example, health insurance provided by employers. This means employees don’t have to pay taxes on the value of health insurance that their company provides them. Capital gains and dividends are taxed at a lower rate.
“Now obviously, higher-income people benefit from this, but so do a lot of retirees. IRAs, 401Ks and other pensions, there are tax deductions for those. And the mortgage interest deduction, which … obviously makes buying a home more affordable.
“And because most of these are considered very popular and very valid by many people, that means closing tax loopholes … I think has been in the past, and will continue to be, very difficult.”