Tax loopholes are not mistakes. Loopholes are incentives designed into the tax code to encourage behaviors that the government prefers. Home ownership is considered a good thing, so the interest on a home mortgage is a tax deduction. That makes owning a home more affordable, so home ownership is encouraged. The mortgage deduction is a loophole. The pattern of all loopholes is that they cause economic decisions to be altered away from some things and towards others. The tax code has over 60,000 pages, with each loophole designed to favor something deemed good, at least by the Congressman who managed to get the loophole included.

The debate over raising the debt ceiling has passed, but the debt crisis will be with us for years to come. Unlike news of celebrity meltdowns and notorious crimes, the debt crisis has some tricky points that the press has not well explained. Everyone needs to know about debt ceilings and default and their consequences, taxing the rich, what the people really want (a miracle, of course), and the balanced budget amendment. There never was a danger of default, but the shape of the real problem has been left ill-defined by the press.

Taxes are explicit, so it is easy to sum them up. Total spending by government at all levels in the US is estimated at $6.41 trillion for 2010. [ 1 ] That’s about 44% of the gross domestic product. So that means that the private sector gets to choose how to spend the remaining 56% of the money, right? Not really. The government also requires us to comply with its rules, and the indirect costs are substantial. My partial list of indirect costs amounts to $1.8 trillion, more than 12% of the economy on top of the 46%.

There was a micro-story in the news this week about a new tax imposed on tanning salons. The 10% tax is supposed to generate $2.7 billion over ten years to help pay for the Obama health care legislation. Why tax tanning salons? Because tanning is related to skin cancer, so it ought to be discouraged by taxation. Everyone knows that whatever is taxed is discouraged, right? But when the revenues from the tax are calculated, the assumption is that there will be no effect, so revenues will be reaped as if no one is deterred. That’s the way tax revenues are usually calculated, which explains why there are usually shortfalls. These days, having computers and such, revenues ought to projected taking tax avoidance into account.