Tax Loopholes & Social Progress

I think most people hate tax loopholes because companies figure out how to use them. But when it comes to tax loopholes for themselves... well.

Argument #1
The entire financial crisis can be considered as part of the result of giving one massive tax loophole to Americans. That would be the mortgage credit. Everybody knows that the financial crisis was initiated because of the failure of housing prices and the increased default rate among mortgage holders. But what got all of those people into the mortgage game in the first place. Well, we always talk about how greedy banks approved ninja loans and burdensome ARM rates. But part of that equation was the fact that all of the families in that game knows they get a huge income tax deduction on their house payment. It is the single largest income tax deduction American families get. Bigger than earned income, bigger than child deductions, and it is especially the case for those sub-prime lendees who spend more than the recommended 30% of their income on their mortgage (and mortgage insurance and all that).  

People going out and getting mortgages is what the government is trying to make you do. That's why they give a tax break for you doing it. 

Argument  #2
Corporations who pay no tax are doing exactly what the government wants them to do. If you believe that what the government wants is good for society, then you should be happiest with those corporations that comply the most with government incentives. 

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When I think about Argument #2 it makes me think about why a flat tax would be very difficult to achieve. First of all, closing loopholes would remove the incentives that companies now have for their behavior. Secondly, it would cost the government power.

You see, when considering the difference between regulation and tax incentives, it is clear to me that tax incentives are easier to do. If you want a company to give public transportation discounts to their employees, you (the Governnment) could do it three ways.

1. You could write that into the tax code.
2. You could write it into regulatary statutes.
3. You could do it yourself.

If you did #3 that means you would have to setup a new agency or new function at a current agency, everywhere. You'd have to hire and train people, buy property or expand current facilities and run all that it takes to get new bus and train passes to millions of Americans.

Or you could have America's companies do it for you. 

If you go with #2, you'd have to provide some kind of enforcement and that means inspections and fines and bringing cases to court for violators. You'd get higher compliance for sure, but..

#3 is a win-win. Just change the tax code and let the facts be known. Already H&R Block and a boat load of tax attorneys everywhere are on retainer by companies everywhere to let them know all of the tax breaks they can get. The effect is that government subsidizes public transportation all the same just by giving up some tax revenues. Compliance is volunatary and the company bears the cost of training and distribution of all those free passes.

Now think of all of the government work in this vein that would get destroyed if you simplified the tax code in the way Herman Cain proposed. Who on Congress is going to give up the win-win way of getting what the government wants out of American business?