Tax Analysts Blog

When Tax Reform Rises From the Dead, What Will It Look Like?

Posted on Nov 12, 2013

As I've said before, tax reform is well and truly dead. But that doesn't mean it's gone forever. Bad ideas, like bad pennies, have a way of coming back. And so do good ideas, which often need time to ripen; few reforms make it through the legislative gantlet on the first try.

But death changes things, including policy proposals. The lobbyists clamoring for tax reform in 2013 have a certain kind of program in mind. But they should be careful what they wish for: When tax reform eventually returns, it may look very different.

Most people assume that the meaning of tax reform is constant, timeless, and revenue neutral. It's defined, in general terms, by a mantra of sorts: lower the rates and broaden the base. The Tax Reform Act of 1986 was built on this formula, and for most policymakers, that legislation remains the model for future revisions to the tax code.

But the 1986 version of tax reform is not the only thing going. Indeed, as my colleague Clint Stretch has noted, for many decades "tax reform" meant something quite different: raising tax burdens on the rich.

I think we're headed for a return to that old sort of tax reform. More specifically, I think we could see a revival of New Deal-style, soak-the-rich taxation.

Throughout the 1930s, President Franklin Roosevelt championed a series of highly progressive "tax reforms" designed to raise the bill for the nation's most fortunate few -- and to leave everyone else alone.

This sort of tax reform proved popular, thanks in large part to the widespread suffering brought on by the Great Depression. But Roosevelt didn't depend on circumstance to sell his proposals. He also sought repeatedly and deliberately to gin up some real political outrage over tax avoidance.

For instance, in 1937, he asked the Treasury Department to identify avoidance techniques popular among the nation's richest taxpayers. The department was ready for this sort of task, having spent much of the mid-1930s investigating exactly these sorts of loopholes. And when Treasury delivered its report to the president, FDR was careful to see that the names of particular taxpayers were leaked to the press. The resulting outrage helped fuel congressional interest in tax reform, and the resulting Revenue Act of 1937 shut down some of the more egregious avoidance techniques.

More generally, however, FDR leveraged popular outrage over loopholes to advance his entire fiscal agenda, including a major overhaul of corporate taxation in 1936. He was always quick to identify the winners and losers under the existing tax regime, with a special emphasis on those paying less than "their fair share." Critics insisted that his public shaming was little more than demagoguery. But Roosevelt understood that it was also good politics.

I suspect that tax reform in the years ahead may look a lot like tax reform in the 1930s. Tax avoidance techniques -- all perfectly legal, mind you -- can lead to their own undoing. Corporations are already learning the dangers of aggressive avoidance, as lawmakers take a hard look at profit shifting and other tax minimization techniques.

It seems likely that individual tax avoidance might produce the same sort of unwelcome legislative attention, especially if our slow recovery from the Great Recession continues to depress tax revenues. Coupled with stagnant wages and widespread economic dislocation, all the pieces are in place for a very progressive sort of tax reform program.

Read Comments (11)

AMT buffNov 12, 2013

Where are all these great opportunities for outrageous individual tax
avoidance? Other than flipping your residence every 2 years, which is more than
a little inconvenient, I just don't see them.

vivian darkbloomNov 12, 2013

"Where are all these great opportunities for outrageous individual tax

"Outrageous" is not an adjective to be found in the original piece by
Thorndike, although he does improperly use the term "loophole" and public
"outrage" over them. The fact that the public may be "outraged" over a
perceived "loophole" does not make a particular tax provision "outrageous"..

It all depends on how one defines "tax avoidance" (outrageous or not).

If "tax avoidance" means legally reducing one's tax bill by claiming mortgage
interest deductions, real estate tax deductions, home equity loan interest,
deduction of charitable contributions, deduction/exclusion of the cost of
health insurance, etc.,these "reforms" , much like the 1986 reforms, could
easily be done in a "progressive" manner. These are not "outrageous", nor are
they "loopholes".

If use of these types of deductions and credits to reduce one's taxes falls
within of "tax avoidance", Thorndike is probably correct.

Although the real battle is over how much tax should be raised as a percentage
of the economy and over the level of spending, any compromise "tax reform" is
likely to be along those lines and "progressive" in result.

Joseph J. ThorndikeNov 13, 2013

It's not clear to me what the improper use of "loophole" might be, since it's a
political or even rhetorical term, not a legal one. I use it in some of my
writing for two reasons. First, because it appears regularly in the historical
record. In the 1930s, for instance, it was routinely tossed around by political
leaders and even some tax professionals to describe a variety of (legal and
often deliberately created) tax preferences. Second, I use the term because
it's in common use today, peppering almost every discussion of tax reform.

Tax experts, however, seem to have an almost visceral reaction against the
term. To some extent I sympathize: it's imprecise. But when talking about tax
politics, that imprecision is at the heart of things. Simply pushing the term
away (and I don't mean to imply, Vivian, that you are necessarily doing that)
is really to miss the point.

I'll close my defense of using the term with a quote from someone who new a
thing or two about such issues: Stanley Surrey. As he wrote in 1957:

"Of course, the use of the appellation 'loophole'
is a matter of viewpoint. What is a 'tax loophole' to a CIO or an ADA meeting
is merely 'relief from special hardship or intolerable rates' to an American
Bankers Association or NAM meeting -and vice versa.

Obviously we do not all feel the same way about each of the examples mentioned
above. But despite an absence of consensus on any particular list of provisions
there seems to be considerable agreement that Congress in its tax legislation
has adopted provisions favoring special groups or special individuals and that
these provisions run counter to our notions of tax fairness. Moreover, the
tendency of Congress to act this way seems to be increasing."

Call those provisions loopholes or call them something else, but they are a key
factor in the politics of tax reform.

vivian darkbloomNov 13, 2013

"It's not clear to me what the improper use of "loophole" might be, since it's
a political or even rhetorical term, not a legal one."

I guess I was under the impression that neither Tax Analysts nor those who
write for it were in the business of "politics" or "rhetoric".

The term "loophole" does indeed appear in the historical record, largely
because rhetoric and politics are nothing new:

See, Boris Bittker, Income Tax "Loopholes" and Political Rhetoric", 1973."

Tax Analysts has been the address of choice for the Boris Bittkers' of this
world for quite some time. I hope that that "history" will not be forgotten in
favor of succumbing to populist street rhetoric.

Joseph J. ThorndikeNov 13, 2013

First, you write: "I guess I was under the impression that neither Tax Analysts
nor those who write for it were in the business of "politics" or "rhetoric"."
Well, I guess I'm the exception to that rule, since I'm an historian of
American politics who happens to specialize in tax policy (and who has been
employed by Tax Analysts for about 20 years now). My point in this blog post
was, in fact, historical, since I see similarities between tax politics today
and tax politics of the 1930s. Second, I like that Bittker piece as much as
you. But his point is proscriptive: using words like "loophole," he argues,
doesn't advance the cause of genuine tax reform. Fair enough. But my point is
descriptive: whether certain provisions (like the preferential treatment of
carried interest, for instance) are loopholes or not, they are widely viewed as
such. If you want to understand the politics of tax reform, then you need to
explore that rhetorical usage on its own terms and not simply dismiss it as
imprecise or misleading.

vivian darkbloomNov 13, 2013

Sorry, Joe, I'm not buy'in the argument.

I would be more sympathetic if I thought you were using the term by quoting
others who "widely" (and wrongly, I may add) view "them as such". But, here,
the word and its usage in this context was completely your own. I understand
that in your role as "tax historian" you may often point out there is a long
rhetorical and political misusage of the term and/or to put it in quotes to
acknowledge the misconception; but, to use that term unreservedly as your own
is quite a different matter.

Joseph J. ThorndikeNov 13, 2013

Well, Vivian, this has been fun. At the risk of beating this poor dead horse
just one more time:

I've always thought that tax experts' effort to delegitimize the term
"loophole" is not unlike the liberal campaign to reject the term "death tax"
(as in "not a tax on death but a tax on on the right to transfer an estate,
etc.) It's not that the objection is itself wrong, but rather that it sidesteps
the real issues at hand.

The estate tax is obviously a death tax; to pretend otherwise is tendentious
(and ultimately tedious). Likewise, loopholes are obviously a "thing" -- part
of the discourse of tax reform. Rejecting the term (or subtly disparaging it by
always bracketing it with quotation marks) is not ultimately very helpful,
whether in historical writing or even contemporary political argument.

But we're never going to agree on this...

All that said, you've certainly awakened my interest in the terminology. I'm
thinking I might do an historical piece on the usage of "loophole" in tax
debates over time. It would be interesting to see how and when it started.

vivian darkbloomNov 13, 2013


I also disagree and discourage the use of the term "death tax". Refusing to
buy into that in no way "sidesteps" any "real issue". Rather, it is an attempt
to obfuscate and sensationalize "the real issue". I also hope this term does
not gain traction at Tax Analysts, whether by the "tax experts" or the "tax

But, I think we can agree on one thing---we are never going to agree on this.

bob kammanNov 13, 2013

FDR message to Congress June 1937 on Tax Evasion Prevention,:

It seems, therefore, that legislation should be passed at this session of the
Congress in order to eliminate these loopholes which our preliminary
investigation has proved; and that as a result of the further investigation
this summer and autumn the next session of the Congress should finally close
any further loopholes which may be discovered ....

"Loophole" in a tax context dates back at least to the late 1800s. Since
loophole originally referred to a type of opening in a wall, its origin may
derive from the early English "window tax."

Joseph J. ThorndikeNov 13, 2013

Bob -- That's helpful and interesting. I know it was in common usage in the New
Deal era, and I'm grateful for the observation that it's much older. Reaffirms
my sense that the word deserves more scrutiny. In particular, does it always
connote "accidental" or "inadvertent"?

Jefferson VanderWolkNov 15, 2013

I understand "loophole" in a legal or tax context to mean an unintended means
of escape from an obligation that would have been imposed if the drafters of
the relevant contract, or the legislators voting on the relevant bill, had been
aware of the possibility of escape. The expression derives from a hole in a
fence. The purpose of the fence is to prevent things from passing through, but
the loophole allows that purpose to be defeated. The term is commonly
misapplied (in my view) to tax breaks that members of Congress were aware of,
or should have been aware of, when voting on the relevant tax bill.

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