05/13/2013 11:40 am ET Updated Jul 13, 2013

Loophole Mythology Versus Kickback Reality

The word "loophole" is constantly used by politicians and the media to justify situations of extreme injustice or inequality. The word itself has a clear definition, "A loophole is an ambiguity or omission in the text through which the intent of a statute, contract, or obligation may be evaded" but it also has a connotation. It suggests that some elite team of fastidious lawyers, accountants, technocrats, etc. combed word by word through a piece of legislation and found an area that the legislators didn't anticipate. This team then exploited this overlooked area to the benefit of a few people while the legislators struggled mightily to plug in those holes like sailors fighting the water rushing aboard a leaky ship. That mythology belongs right next to the Schoolhouse Rock version of how legislation is enacted as a cute story that has virtually no bearing on reality.

Loopholes are generally not accidental oversights by legislators. No, they are usually more accurately called "kickbacks," tossing money and/or power back to those who were so kind to provide major campaign support.

Take the carried interest loophole as an example. This piece of legislative distortion allows hedge fund managers to declare their millions and sometimes billions in annual salaries as being the results of a long term investment rather than income. This lets their salaries be taxed at the much lower capital gains tax rate rather than the rate that ordinary income is taxed. Who gets hurt by this kickback...or should I pretend that this is a "loophole" that has magically missed being corrected every time it is pointed out? Everyone who isn't a hedge fund manager pays the price for this kickback, a kickback that helps plant about $6 billion in hedge fund manager's pockets while ordinary tax payers are faced with increasing challenges to make ends meet. Fear not that the extra billions being put in hedge fund manager's pockets goes to waste. After all, a few million from those hedge fund manager's billions in tax savings is sprinkled to politician's campaigns to ensure that this kickback stays alive and well.

It is important to distinguish between intentions and actions. When someone truly intends to take a fair and equitable approach, but it later becomes distorted, then that really is a loophole. When someone had no intention of creating a solution that was fair or equitable, then kickback is a much more accurate word. Next time you hear the word "loophole" tossed out by a politician or in the media, try substituting the word "kickback" and see which of the two words is really more accurate.

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