I would agree with your loophole assessment. The easiest way to close such a loophole is to simply shift from income taxes to consumption taxes. (i.e. VAT and the like)

Then, you get two (perhaps three) desired effects:

1. Loopholes don't exist. (or exist for everybody)

2. Adding more value is not punished, consumption is.

3. The last effect is that it may slow growth, which may or may not be desirable.