Let me get this straight - if someone spends money improving something (i.e. making it more valuable), it's strange that it's value should increase as a result? If the tax is to be based on property, then it is only right that money spent improving the property/land should be factored in and cause the value to change. Otherwise if improvements to land and property are ignored you'll end up with the bizarre situation of people wanting to buy a blank plot of land and spending a load of money improving it by building a house on it, yet only paying taxes on the plot of land. Meanwhile a tax solely on land rather than property wouldn't make too much sense either - the primary reason for taxing property is it is a very easy way of gauging someones wealth, and property taxes are in effect wealth taxes. It's virtually impossible to get someones actual wealth and tax that, so if you do want to tax wealth property (which will be the combined value of the land and any buildings on it, whose value will increase if they are improved) is the next best thing.
If I build a house on the land, the property tax (originally meant as a land tax) goes up.
I have heard liberals call for an "asset" tax. The fact is, we already do since property taxes have morphed into that very tax.
How it works:
So I earn $1M. The federal government takes $.35M of it. The state takes another $.05M.
With my remaining $.60M I decide to build a house. The state then taxes me another $.05M on building it (sales tax).
Then, every year, having taken $.45M from me to build my $.6M house the township is going to tax me about $.02M every year for it because I chose to build a house there. Before, the land was worthless but now they are not just taxing the land, they are taxing the asset (the house) I put on the land.
So even if I get sick and I've paid off my house, I still have to pay the $.02M a year in taxes and if I don't, they'll kick me out.
We never truly own anything anymore, it's all really owned by the government.
Also since you asked for loopholes, a common one with progressive tax systems (depending on the specific tax legislation) is income splitting. That is, lets say you earn $1m, and you have a close family member (or very close friend) who you like to give money to. Rather than earning the money yourself, and getting taxed at the much higher rate (because you're rich) and then giving it to them, you find a way to get them to earn some of your income. So for example a business owner could employ that person to do a job even if they're not the best person for that job/are paid too much for what they do (within reason, of course - you would be unlikely to get away with employing your son and paying them $100k for filing).
How exactly is that a loophole?
So I earn $1M and I pay/give someone else more than they should. I'm still out of the money.
To use your example: I make $1M. I give my uncle $100k to mow my lawn. I save $35k in taxes but have given out $100k. I'm $65k worse off.
Now maybe the uncle gives me the money back. That's illegal unless I claim it as income which brings us back where I started from.
Another 'loophole' is where differences in the treatment of capital gains and income exist, with capital gains often getting more prefential tax treatment, meaning if you can structure your income in a particular way you might get away with classing some of your income as a capital gain. Again the specifics of the tax legislation will affect how the two are defined and are unlikely to give that much scope, but it can still be done especially with a business that hasn't paid a close attention to such issues. Off the top of my head take shares where you can earn an income (dividends) or a capital gain (share increases in value). Since you have double taxation issues the treatment will vary but you are likely to have a difference one way or the other between the tax treatment of the dividend income and the tax treatment of the capital gain. Meanwhile a company can influence which will occur - if it has a load of profits, it can issue them as dividends to shareholders, or it can use the profits to buy up shares, causing their price to rise (given certain assumptions) resulting in a capital gain for the holders instead.
No, that doesn't work either because in the example you give, the company can't claim the dividends as an expense. The most you can do is reduce your payroll tax.
When I pay myself, the company can claim that as an expense. But if the company pays me as a dividend, I can claim that at the capital gains tax rate (15%) but the company can't deduct that money so now I've paid 15% in taxes PLUS my company has to pay the 35% in taxes still on it. So now, that's not a loophole. The only benefit is that I avoid payroll except again, payroll is 12% (both sides) whereas capital gains is 15% so I end up losing 3%.
If you can't get away with classing income as capital gains, then you can still always look at that income itself - maybe you can get a non-cash benefit instead of traditional income that happens to get around the various tax rules and not be taxed fully (again the specifics of the tax system would affect the extent to which this is possible, but they've usually got a few incentives put in to allow some items to not be counted fully as income which in turn creates loopholes that can be used).
Other than reducing payroll taxes you're still out of luck.
For instance, you can set yourself up as an LLC and then have your company pay you as an LLC (like a contract). As the owner of the LLC, you give yourself a disbursement which avoids payroll taxes and the company can still deduct the cost still.
But the government knows this "loophole" and doing this greatly increases the odds of an audit and all you've saved is some payroll taxes (and SS tops out at $100k anyway so you're only saving Medicare).
Now if Obama eliminates the cap on SS taxes, then you'll see a lot more of that.
