The conversation on corporate tax expenditures is complicated by an official tax baseline that relies on a misleading definition of spending through the tax code.
The US government uses the term tax expenditure to describe both privileges granted to politically favored special interests and patches to the tax system that address economic inefficiencies created by the income tax code. This use of the term confuses two very different phenomena and muddies policy discussions about tax reform.
A new study from the Mercatus Center at George Mason University examines the current accounting of tax expenditures, presents case studies of some corporate tax expenditures, and proposes reforms to reduce favoritism in the tax code. The study investigates the difference between tax expenditures that privilege a particular group at the expense of others and tax provisions that, if properly accounted for, would not be counted as tax expenditures at all.
A corporate tax expenditure is defined as a provision in the tax code that allows a firm or group of firms to not pay a tax which would otherwise be collected.
- The modern US tax system is built on the income tax. This system double-taxes investment and savings, distorting market decisions and slowing economic growth.
- To correct these distortions in the income tax, some special tax provisions were created to mitigate biases against savings and investment and offset other distortions.
- Current methods employed by Congress’s Joint Committee on Taxation (JCT) and the administration’s Office of Management and Budget (OMB) for assessing the fiscal impact of tax expenditures use the income tax as the “baseline” from which to make their count.
- Under the current accounting methods, broadly available tax expenditures that correct for economic bias are economically indistinguishable from government-provided tax subsidies that benefit some businesses and industries at the expense of others.
- A superior tax expenditure baseline would rely on consumption, which would provide a more equal
treatment of economic activity and focus attention on tax provisions that truly provide unfair advantages.
However, even by the standards of a consumption baseline, most corporate tax expenditures are unnecessary privileges that provide unfair advantages to certain industries and firms.
- Sixty-five percent of corporate tax expenditures privilege certain activities or industries while excluding others.
- The proliferation of corporate tax expenditures results in disparate effective tax rates that distort consumption and investment and motivate wasteful rent-seeking.
- The growth of tax expenditures also increases compliance costs by contributing to the lengthening of the tax code, which in the past 30 years has nearly tripled in length, from 26,300 pages in 1984 to the almost 75,000-page behemoth it is today.
The federal government collected $1,476,218,000,000 in the first half of fiscal year 2016.
Ali Meyer reports: Inflation-adjusted federal tax revenues hit a record $1.48 trillion for the first half of fiscal year 2016, but the federal government still ran a $461 billion deficit during that time, according to the latest monthly Treasury Department statement.
Treasury receipts include tax revenue from individual income taxes, corporate income taxes, social insurance and retirement taxes, unemployment insurance taxes, excise taxes, estate and gift taxes, customs duties, and other miscellaneous items.
In the first half of fiscal 2016, which included the months of October, November, December, January, February, and March, the amount of taxes collected by the federal government outpaced the first half of all previous fiscal years, even after adjusting for inflation. Read the rest of this entry »
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