Happy New Year, kiss your tax breaks goodbye

Our current model of high tax rates, peppered with loads of special breaks and exemptions, has a number of significant advantages for the political class.  It allows them to hide the true weight of the tax burden from the American public.  It gives them a way to reward big donors and favored constituencies.  It turns the tax system into an instrument of control, instead of a simple mechanism for funding modest government.  Tax breaks can be used to encourage certain behaviors and, by extension, discourage activities that would expose taxpayers to a higher rate.  The tax system is even used to distribute welfare payments through tax credits, sending “tax returns” to people who didn’t actually pay any income tax – a system that is abused to the tune of about $14 billion per year in false claims.

This system imposes some pretty big disadvantages on the people obliged to live under it.  Perhaps it’s quaint to talk about the freedom lost to the manipulation of behavior with tax breaks, or the freedom we lose when our Ruling Class hides the true cost of everything we’re allowed to vote on.  The current tax system is a fraud, as we would easily understand if government was a product sold to us by swindlers, and we later discovered that both its cost and quality were misrepresented by the salespeople.

But another painfully obvious disadvantage is the unpredictability of our tax burden.  Exemptions come and go.  Tax increases usually last forever, until some future Congress considers a reduction, but tax exemptions tend to have built-in expiration dates.  It’s tricky for businesses to make long-term plans when this year’s tax breaks are about to quietly disintegrate.  And that’s exactly what’s happening as 2013 draws to a close, as detailed by the Associated Press:

In an almost annual ritual, Congress is letting a package of 55 popular tax breaks expire at the end of the year, creating uncertainty — once again — for millions of individuals and businesses.

Lawmakers let these tax breaks lapse almost every year, even though they save businesses and individuals billions of dollars. And almost every year, Congress eventually renews them, retroactively, so taxpayers can claim them by the time they file their tax returns.

No harm, no foul, right? After all, taxpayers filing returns in the spring won’t be hurt because the tax breaks were in effect for 2013. Taxpayers won’t be hit until 2015, when they file tax returns for next year.

Not so far. Trade groups and tax experts complain that Congress is making it impossible for businesses and individuals to plan for the future. What if lawmakers don’t renew the tax break you depend on? Or what if they change it and you’re no longer eligible?

“It’s a totally ridiculous way to run our tax system,” said Rachelle Bernstein, vice president and tax counsel for the National Retail Federation. “It’s impossible to plan when every year this happens, but yet business has gotten used to that.”

A selection of the expiring deductions and rebates gives a hint of the tax system’s complexity.  This is just the stuff we’re losing.  Imagine the labyrinth that remains.

Some of the tax breaks are big, including billions in credits for companies that invest in research and development, generous exemptions for financial institutions doing business overseas, and several breaks that let businesses write off capital investments faster.

Others are more obscure, the benefits targeted to film producers, race track owners, makers of electric motorcycles and teachers who buy classroom supplies with their own money.

There are tax rebates to Puerto Rico and the Virgin Islands from a tax on rum imported into the United States, and a credit for expenses related to railroad track maintenance.

A deduction for state and local sales taxes benefits people who live in the nine states without state income taxes. Smaller tax breaks benefit college students and commuters who use public transportation.

A series of tax breaks promote renewable energy, including a credit for power companies that produce electricity with windmills.

The AP story quotes Rep. John Lewis (D-GA) of the House Ways and Means Committee expressing sympathy for businesspeople forced to navigate this minefield of exploding tax code, calling it a “shameful” result of a “divided, dysfunctional Congress.”  He’s right about the shameful part, but something tells me it wouldn’t be much different if we had a unified Congress marching in party lockstep.  For one thing, as a consultant quoted by the AP cynically but accurately points out, serving up a vast buffet of automatically expiring tax breaks keeps the lobbyists pouring into Washington with all that lovely campaign money.

Also, it helps legislators game the budget system by counting only a few years of “cost” for the exemptions and rebates they write into the tax code.  This gives them more hypothetical future money to spend on other priorities.  When the appointed hour of expiration for tax breaks arrives, they can call for renewal by pointing out how much businesses and constituencies who demand on the tax relief in question would be harmed by its termination.  This lets Washington have its cake and eat it too – they spend they money they’ll “save” when tax exemptions end, then campaign for extensions when the end is nigh.

Of course, the cost of maintaining tax relief is always described as 100 percent pure deficit spending, as when the Associated Press explains why the 55 deductions slated for doom (and possibly rescue, at some point later next year) were only renewed through the end of 2013 last time:

Why such a short extension? Washington accounting is partly to blame. The two-year extension Congress passed in January cost $76 billion in reduced revenue for the government, according to the nonpartisan Joint Committee on Taxation. Making those tax breaks permanent could add $400 billion or more to the deficit over the next decade.

With budget deficits already high, many in Congress are reluctant to vote for a bill that would add so much red ink. So, they do it slowly, one or two years at time.

Of course, new spending is rarely described as high-octane red ink, and you’ll never hear the perpetual continuation of even the most temporary emergency spending program described that way.  Tax breaks are regarded as expensive luxuries Uncle Sam really can’t afford to shower upon his nieces and nephews.  The less carefully targeted and obscure they are, the more irresponsible Washington culture portrays them as.  This is consistent with the desire of the Ruling Class to hoard power, even when it gives money back to its subjects.

It would be interesting if we had a fair, flat tax system that distributed the burden as honestly and evenly as possible.  How much money would the American people choose to give their government under those circumstances?  We’re nowhere close to realizing such a dream of freedom and transparency.  There are reform proposals to simplify the tax system, but they’re more about cleaning up the existing code a bit, dusting a decade or two of cobwebs out of the old maze but leaving it otherwise intact.  The sad truth is that proposals to bring us a truly fair or flat tax system would run into insurmountable resistance from the people who benefit most from the complexity of the current regime, including a sizable population that believes it’s enjoying a free ride while everyone else runs through the maze.  They’re not entirely correct in that belief – the “free riders” pay a lot of hidden and pass-through taxes, some of which are exceptionally high to fund complex tax breaks for other industries.  It’s a wonder that anyone can look at an electorate misled by so many official illusions and consider them truly free.

Update: I wouldn’t bet on that wind-energy tax credit staying down for the count.  The Christian Science Monitor notes that it enjoys bipartisan support, courtesy of Republican governors in Big Wind states, and quotes the American Energy Alliance – which represents oil, coal, and natural gas companies – observing that wind energy tax credits are “now more valuable than the price of the electricity that the plants actually generate.”   The AEA also points out that “green” energy gets 55 percent of federal energy assistance, while generating only 10 percent of the nation’s electricity.  That’s a lot of lobbying muscle, flexed by an industry that requires preferential tax treatment to survive.