What are tax loopholes?

In discussions about reducing the federal government deficit, the term tax loopholes was used frequently. Tax loopholes sound like tax benefits that people or businesses shouldn’t receive. But, as N.C. State University economist Mike Walden explains, this isn’t correct.

“Well, no, you’re not correct . And I’m not saying you per se, but I think that’s the general perception. Tax loopholes are just a short term … used to describe bona fide — and official and legal — tax deductions, and tax credits, and tax exemptions that people and businesses are allowed to take. So, they are absolutely legal.

“Some of them may be very obscure. Some of them may be limited to certain people and certain businesses. But they’re absolutely legal. They are in the tax code.

“If you have a complicated financial life, whether you are an individual or business, you may hire a tax accountant to find as many of those as you can take. But there’s nothing illegal about them. So, I think this is just a shortcut.

“Now what we’re hearing in the discussion about the debt limit and the deficit and so forth is the notion that rather than the federal government increasing tax rates that they may want to go in and look at some of these tax deductions, credits and exemptions and begin to limit them.

“And so one that’s been thrown around that I don’t think will happen is the mortgage interest deduction. That, you could argue, that is a tax loophole, if you’re going to use that term. This is a deduction that people who own homes and have a mortgage get on the interest on that mortgage. There’s been some discussion perhaps limiting that to households under a certain income level.

“So, really have to watch, you really have to watch terminology here, and unfortunately tax loopholes, I think, have a negative connotation for what is a very, very legal process.”

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