The road to> tax reform has to start somewhere. One of the first priorities should be stripping out targeted tax breaks that benefit favored constituencies at everyone else's expense. They are bad public policy for two big reasons.
First, they are used by Washington politicians and bureaucrats to micromanage the economy by picking winners and losers. This is crony capitalism in action, and it's not a good thing.
Second, targeted tax breaks encourage governmental corruption, because those who get the goodies are expected to return the favor -- one way or the other. I think we can all agree that corruption is bad.
Let s get specific. I quickly came up with four examples of targeted tax breaks that need to be swept out (there are many, many more, but I m only allowed so many words here).
Over-Generous Mortgage Interest Deduction
We can argue about whether the tax system should be used to encourage homeownership. But whichever way you lean, it s hard to defend the fact that homeowners are allowed to deduct interest on up to $1.1 million of mortgage debt on a primary residence plus a vacation home, while renters can t deduct anything. Beyond the issue of fairness, the too-generous mortgage interest write-off undoubtedly contributed to the housing bubble. The subsequent collapse will cost taxpayers, including renters, gazillions to repair. Source: Section 163(h)(3) of the Internal Revenue Code.
Percentage Depletion for Oil and Gas Wells
Eligible oil and gas producers are allowed to deduct 15% of revenues as a so-called percentage depletion write-off. Here s the problem: You should only be able to deduct things that actually cost you money. The 15% depletion write-off is based on revenues rather than expenses. In other words, the deduction has nothing to do with economic reality. While I m all for energy independence and expanding domestic oil and gas production, it s time to give the heave-ho to this longstanding but ill-conceived tax break. Source: Section 613A of the Internal Revenue Code.
Domestic Production Activities Deduction
The quick history goes like this. First Congress considered simply lowering the corporate income tax rate to stimulate job formation right here in the USA. But that idea was too broad-based to allow for micromanagement, so Congress thought about inventing a targeted tax break for manufacturers. Predictably, a lobbying frenzy ensued, and the end result was the so-called domestic production activities deduction. With dazzling complexity, it gives big write-offs to (among many others) producers of films and sound recordings, software developers, construction contractors, architects, farmers, and honest-to-gosh manufacturers too. However if you run a restaurant, your domestic production activity was deemed unworthy. Conclusion: It s all about the lobbyists, baby! Source: Section 199 of the Internal Revenue Code.
Golf Cart Tax Credit That s Not for Golf Carts
You won t believe this. You can claim a federal income tax credit of up to $2,500 for buying a four-wheeled plug-in electric vehicle that weighs no more than 3,000 pounds when fully-loaded and has a top speed of 20-25 miles per hour. Although the vehicle must be primarily for use on public streets, the only thing I can imagine that meets the description is an electric golf cart with a little bumper sticker that says intended for street use. The statutory language for this credit is buried in a heaping pile of zany tax incentives that were supposed to create all those green jobs that nobody can actually find. To be sure, golf courses are green, but one has to wonder if there wasn t another kind of green that changed hands here.
P.S.: When this goofy break got some embarrassing press, the IRS quickly issued a requirement that qualifying vehicles must come with certifications saying they are not mainly intended for golf course transportation. OK, but please tell me what the credit is meant to cover if not golf carts. The credit is scheduled to remain on the books until 2012. Sources: Section 30 of the Internal Revenue Code and IRS Notice 2009-58.
The Last Word
Some people (like me) advocate lower taxes. Others favor higher taxes (go figure). Whichever direction we choose, we need to go there with a simpler and fairer system. If we choose lower taxes, make it happen with across-the-board rate cuts that benefit everyone who pays taxes. Let the economic chips fall where they may. If we choose higher taxes, make it happen with across-the-board rate increases that spread the pain as widely as possible, with no exceptions for politically-favored constituencies. Keep these thoughts in mind, because the winds of change are blowing, and the November election will be here before you know it.