Tax loopholes are universally denounced across the political spectrum. Democrats revile them as egregious giveaways to the “rich” that should all be tightly sealed up in the interests of “revenue enhancement” for deficit reduction, infrastructure investment, propping up collapsing entitlement programs, etc. Republicans condemn them as major barriers to the implementation of a more business- and investor-friendly flat tax. Even free market economists oppose tax loopholes as inefficient and “non-neutral” to the market economy’s allocation of resources–as if there existed an optimal pattern of coercive redistribution of income from productive, private taxpayers to parasitic, political tax-consumers that was neutral to the market.
Needless to say Ludwig von Mises, who never took his eye off of the larger politico-economic issue of capitalism versus socialism, freedom versus statism, did not share the modern aversion to tax loopholes founded on baseless economistic concerns about “effiiciency” and “tax neutrality.” He pithily summarized the case in favor of tax loopholes, according to the following anecdote related by Paul Samuelson (“Tribute to Gottfried Haberler for American Enterprise Institute Memorial, 18 September 1995″) :
Some of us at sherry before a Fiscal Policy dinner in the Harvard Faculty Club were beefing about certain tax loopholes in the IRS code. Gotttfried [Haberler] whispered quietly, “Capitalism breathes through those loopholes.” The next day I told him how much I had liked his aphorism. Always the straight-arrow scholar, he said, “Yes, but the words are those of Ludwig von Mises not Gottfried Haberler.
UPDATE (November 28): Mises spoke about loopholes in similar terms but at greater length at a conference in White Sulphur Springs, West Virginia, April 5-8, 1951. There he said:
What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the law. . . . The income-tax exemptions in our income tax are not loopholes. The gentleman who complained about loopholes in our income tax . . . implicitly starts from the assumption that all income over fifteen or twenty thousand dollars ought to be confiscated and calls therefore a loophole the fact that his ideal is not yet attained. Let us be grateful for the fact that there are still such things as those the honorable gentleman calls loopholes. Thanks to these loopholes this country is still a free country . . . .
HT to Danny Sanchez for this reference.