Closing Corporate Tax Loopholes: A Good Idea?

by Michael Diaz Jr. - Diaz Reus International Law Firm

One of the most heated debates among Americans is whether to close the so-called corporate loopholes. However, there is wide misconception as to what exactly are “tax loopholes.” According to Eric Toder, co-director of the Left Leaning Tax Policy Center, people view tax loopholes as gaps in the law that corporations have taken advantage of for years. Toder explains, however, that “most of these proposals were not ‘loopholes,’ they were incentives.” 

The Most Significant Corporate Tax Loopholes

Among the most attractive loopholes are inventory property sales, graduated corporate income, exclusion of interest on state and local bonds, research and experimentation tax credit, deferred taxes for financial firms on certain income earned overseas, alcohol fuel credit, credit for low-income house investments, accelerated depreciation of machinery and equipment, deduction for domestic manufacturing, and deferral of income from controlled foreign corporations.

The inventory property sales credit benefits multi-nationals with operations in high tax foreign countries. Since the foreign income of American companies is taxed in the country in which it is generated, the U.S. gives a tax credit for that amount in order to avoid double taxation. The cost to the government of this credit on a five-year projection is estimated at $16.7 billion.

Similarly, the accelerated depreciation of machinery and equipment credits benefit large manufacturing corporations in the airline and motor sports businesses that use large equipment that lasts many years. This credit allows companies to deduct all of the depreciation of a piece of equipment at once (as opposed to the amount of time it actually takes for the item to depreciate).  The cost to the government of this credit on a five-year projection is estimated at $51.7 billion.

For example, auto racing track owners and the National Association for Stock Car Auto Racing (NASCAR) have greatly benefited from this credit. According to lobbying disclosure forms, NASCAR and track owners have spent hundreds of thousands of dollars lobbying for this credit.  Their goal is to make the depreciation classification permanent so racetrack owners can deduct more in expenses, reducing the taxes that they must pay. Supporters in Congress argue that this break is necessary to maintain the current standard expected by their competitors and fans. The opposition groups counter that to keep this credit alive will cost taxpayers $46 million this year and an additional $95 million through 2017. As a result, a worker who earns $50,000 a year will pay at least $80 more per month in taxes.

Large corporations and multi-nationals are not the only ones benefiting from such corporate tax loopholes. The graduated corporate income loophole benefits individuals that own small corporations. This incentive places the first $50,000 of a corporation’s profit at a 15% tax rate, with higher profit levels subjected to higher tax rates until it tops out at 35% for taxable corporate income exceeding $335,000. By paying only 15% in taxes on the first $50,000 of profit, a small corporation is able to retain more money for reinvestment. The cost to the government of this credit on a five-year projection is estimated at $16.4 billion.

The deduction for domestic manufacturing benefits any U.S. company that produces a product within U.S. borders. This credit allows for a tax deduction for manufacturing activities by American companies within the country and covers from conventional manufacturers to industries such as software development and film production. The cost to the government of this credit on a five-year projection is estimated at $58 billion.

Is It A Good Idea To Close The Corporate Tax Loopholes?

During the recent presidential campaign, the issue of whether corporate tax loopholes should be closed was a hot topic. Neither party likes the current tax system for corporations. Both Democrats and Republicans agree it is riddled with too many loopholes. However, the process of closing corporate tax loopholes is not as easy as it seems. If done incorrectly, it could possibly hurt the poor and the working middle class, as well as remove incentives for businesses to invest.  According to economists Hane Gravelle and Thomas Hungerford from the Congressional Research Service, “it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening.”

Even if all loopholes were eliminated, the government would not be able to raise trillions of dollars because taxpayers likely would change their behavior to avoid higher levies. Furthermore, more than simply raising taxes on the “rich,” closing loopholes could negatively impact the middle class and poor. As Robert Rubin, President Clinton’s Treasury secretary explained, reducing tax expenditures “will not raise nearly the revenue needed for sufficient deficit reduction without increasing taxes on the middle class significantly.” 

It is also important to consider that some loopholes serve vital public purposes such as the research and development tax credit. This credit encourages companies to conduct more research, which benefits their employees, other businesses, and ultimately customers—who pay taxes. In summary, Congress must carefully assess the impact on society of closing any of the current tax loopholes. Closing all loopholes may not raise the desired revenue, and worse, could motivate people to simply adjust their finances to avoid higher taxes and hurt the overall economy in the long run.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Diaz Jr. - Diaz Reus International Law Firm | Attorney Advertising

Written by:

Michael Diaz Jr. - Diaz Reus International Law Firm

Michael Diaz Jr. - Diaz Reus International Law Firm on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.