Tuesday, 2 July 2013

Licensed to Kill?

The ongoing congressional push for tax reform continues to focus on tax breaks.  In a new twist, Senators Baucus and Hatch have asked their colleagues to provide a "pardon list" identifying those tax benefits worth sparing.

Two breaks that will appear nowhere on any pardon list are tax-free corporate reorganizations and international tax treaties.  That may sound encouragingis it possible that members of Congress will turn a deaf ear to the pleas of big corporations and powerful multinationals?but the truth offers little reason for optimism.

Those preferences, unlike charitable deductions and the exclusion for employer-provided health insurance, simply don't need a pardon.  Why not?  In effect, they have a license to kill.

Although—or, a cynic might suggest, because—both of these longstanding features of the tax law provide vast, open-ended benefits to the well-connected and influential, no uncomfortable questions ever get asked about the large sums of cash they deliver to taxpayers.  Their special status has decades-old roots in the design of what is known as the tax expenditure budget.  Not as comprehensive as it purports to be, that mechanism counts the cost of some tax breaks, but not all.  Those tax breaks not included on the tax expenditure budget escape all scrutiny during the budget process. 

Like Keyser Söze, and the devil before him, these tax breaks have managed to convince the world that they don't exist.  When Congress trains its big guns on tax breaks that benefit the old (like the additional standard deduction for elderly taxpayers) and the infirm (like the exclusion for workers compensation), don't forget the generous preferences they never mention.

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