Tax Analysts Blog

Cold-Hearted Tax Reform

Posted on Aug 12, 2013

Perhaps it still goes on: silk-suited, Gucci-clad lobbyists buttonhole legislators outside hearing rooms to remind them that their big business clients are funding their re-election campaigns. This is the image that tax reformers like to stir into the heads of the public when they are cheerleading for their cause. Big oil companies, especially when gas prices are rising, are a favorite target of tax reformers. But actually, the major oil companies do not receive large tax benefits. (See here and here.) Tax reform would be so much easier if all the tax benefits went to the bad guys.

The reality is that most tax breaks have a shiny halo over their heads. As they teach you in Lobbying 101, the best way to get a tax benefit is to put it in the wrapper of a sympathetic cause. Take your pick: helping the poor, curing the sick, supporting hard-working middle-class families, unshackling America's small business, and--when all else fails--promoting the competitiveness of job-creatng U.S. businesses that face unrelenting foreign competitors.

Last week several news outlets reported that supporters of the orphan drug credit were swarming Capitol Hill to get their message across. (here, here, and here) Section 45C of the Internal Revenue Code of 1954 allows a credit against tax, of up to 50 percent of clinical testing expenses related to the development of a drug for a rare diseases. Rare diseases for this purpose are diseases that afflict less than 200,000 people. For example, muscular dystrophy and cystic fibrosis fall into this category. Do you think any member of Congress told any visiting mother of a disease sufferer that cutting this corporate tax break would be necessary because the U.S. statutory rate was the highest in the world?

Another impossible-to-repeal provision in the current code is the extra deduction for the blind. It was originally enacted into law in 1943. People with disabilities have extra costs and extra hardships that justify tax benefits. But why just the blind? Why not the deaf or those suffering from other disabilities? But what member of Congress wants to be on record voting to repeal a tax benefit for the blind?

And what about tax benefits for veterans? For example, the VOW to Hire Heroes Act of 2011 made changes to the Work Opportunity Tax Credit including adding new categories to the qualified veterans targeted group and expanding the WOTC to make a reduced credit available to tax-exempt organizations for hiring qualified veterans.

It was not easy getting these tax breaks into law. It will be even harder getting them out. But it is routine for tax reformers--Simpson-Bowles, proponents of the Flat Tax ("no deductions or special interest looopholes") and the Fair Tax--to include all tax expenditures--including the ones above--on their list of tax breaks to be entirely eliminated in order to pay for lower rates. Tax reform is a very worthwhile cause, but we need to manage our expectations about what tax reform can accomplish.

Read Comments (2)

edmund dantesAug 16, 2013

Four reforms will be sufficient:

1. Bring all non-profits into the taxable arena, and end the charitable
deduction for all.

2. Tax the benefit of health insurance to employees.

3. End the mortgage interest deduction. Classic example of a tax preference
that alleges to help the buyers, but in fact only serves to increase prices and
create windfall gains for the sellers.

4. End the tax freedom of muni bonds.

If you broaden the base by phasing in these measures over a couple years, you
could keep the many minor tax preferences you mention. Although I am
disappointed that rich drug companies have to be bribed with tax credits to do
work on "orphan drugs."

I would not change the rules for qualified retirement plans, as these are tax
deferrals, not tax forgiveness, as the first four items listed are.

Oscar ShankJan 5, 2014

There can be no effective tax reform until there is effective campaign finance
reform. The two are interrelated. It's bipartisan rule by special interests to
benefit the 1%

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