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.
“Boehner resigning at end of October,” a Republican representative texted National Review from the House conference meeting. A second congressman confirmed the news.
Boehner has been under pressure from a group of rank-and-file conservatives for months, culminating in the House Freedom Caucus vowing not to vote for any continuing resolution to fund the government that contains money for Planned Parenthood. That pledge came after an HFC member, North Carolina Representative Mark Meadows, filed a motion to vacate the chair — that is, depose the speaker — in August.
Boehner considered holding a vote on the motion, according to one House Republican familiar with his thinking, but did not do so out of concern that he would not have the support needed to defeat the motion outright.
Andrew Johnson reports: Ted Cruz encouraged his Senate colleagues to pass a continuing resolution that would fully fund the federal government’s intelligence-gathering community, which director James Clapper said was at risk amid the shutdown. The Texas senator called on Senate majority leader Harry Reid and President Obama to help pass and sign it into law similar to ensuring funding for payment for those serving in the military.
“If the Senate cooperates, we could get this passed by the end of the day,” Cruz said at a Senate Judiciary Committee hearing on Wednesday morning. “I hope that issues of partisan politics can be set aside and we can all come together and pass right now, by the end of the day, a continuing resolution to fully fund the Department of Defense and the intelligence community.”
During the hearing, Clapper told the committee that 70 percent of the intelligence-services workforce had been furloughed because of the shutdown.
Rich Lowry notes: The Democrats are perfectly content to have a shutdown because they assume Republicans will be blamed. They could be wrong – it will be a fluid situation and things could bounce in an unexpected way – but it’s not a bad bet. The media, as Mark Halperin said this morning, will take the Democratic line during a shutdown, and given that Republicans are the anti-government party, there will be a natural tendency on the part of the public to believe they are solely responsible. I still think that House Republicans could trump the Senate Democrats if they made the fight about the Vitter amendment, and then go into the debt-limit fight without having suffered a damaging defeat over the CR, but no one seems to know what will be the House’s next move.