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July 13, 2006
Tax breaks as economic policy
David Wessel's "Capital" column in today's Wall Street Journal is all about that myriad of tax breaks individuals can claim -- "Tons of Tiny Tax Breaks Prove To Be Addictive and… Taxing".
But the real driver of all this is that Congress has turned the tax code into a theme park, with a tax break for every good cause. Each one makes sense: Congress decides it's in the public interest to encourage people to use mass transit. Allowing employers to take money out of workers' checks, shield the money from taxes, and then give workers fare cards instead of pay is a reasonable, cheap approach. Workers are happy: They've saved money. Some probably think employers are giving them an extra benefit. Employers surely don't mind that.
So what's the problem? Add this tax break to the dozens of others that decorate the tax code, and we get higher tax rates than otherwise needed to bring in the same sum. We get a lot of hassle and complexity that chews up time and money. And, I suspect, the government creates tax breaks that are claimed far more often by sophisticated, upper-income taxpayers than by others.
And do these tax breaks actually accomplish their goals, or just make politicians feel good? Does up to $105 a month in tax-free mass-transit fare cards actually increase use of mass transit? Maybe. The tax break seems to have produced a somewhat bizarre parallel tax break for parking -- up to $205 a month for some reason -- so constituents who don't live near or use transit systems don't feel jilted. Hard to see how that fosters "energy independence."
Joel Slemrod, a University of Michigan tax economist, has a theory about what's behind this: marketing.
Politicians figure you won't bellyache so much about taxes if they quote a high price and then give you discounts -- in the form of deductions, credits and other tax breaks. And they figure 10 little tax breaks make people feel better than one big one. "I probably ignore more of them than I should because I find them to be tremendously intrusive and such a hassle," he says. He probably never used those 50-cents-off coupons at the supermarket either.
The proliferation of tiny tax breaks, each with its own complexity and paperwork, doesn't rank up there on the worry list with persistent poverty, stagnating wages, mounting debt or deadly disease. On the other hand, it ought to be easier to fix.
I suspect the same dynamic is behind all those corporate/business tax breaks as well. For example, as a speaker at a recent Athena Alliance/CELI event [summary coming soon] mentions, there is no evidence that the R&D tax credit actually spurs increased R&D. And increased R&D many not be the sole driver of economic growth. Innovation broadly defined is the driver of economic prosperity -- and our investment tax rate maybe more important in that regard than a targeted R&D tax credit.
But targeted business tax breaks are easier to legislate (some would say, sneak in) than addressing the broader issue of tax reform -- as illustrated by the recent experience of the President's Advisory Panel on Federal Tax Reform.
If you want to understand American industrial policy, you have to look to the tax code. That myriad of tax breaks -- big and little -- that dominate the tax code define how we view our economic structure. Yet no one has done the systematic study of what that vision looks like. I have to assume that it is like through a glass darkly -- fragmented, contradictory and inefficient if not ineffective.
I also suspect that it is geared toward the past, not the future. Just one of the many policy areas that have not caught up with the I-Cubed Economy.
Posted by Ken Jarboe at July 13, 2006 4:03 PM
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