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Obama Tarries on Tax Reform, Loads Up New Tax Breaks

David Godow
February 16, 2011, 10:41am

Will the Obama budget, if accepted, actually make the tax code worse? Howard Gleckman at the Tax Policy Center suggests that at the very least it won't be better (I noted some of the missed opportunities for tax reform yesterday). As Gleckman points out, the 2012 budget, while cutting some tax preferences for energy companies and the wealthy, actually loads up the tax code with even more. We can't be inserting new tax breaks that further narrow the base while misallocating resources to boondoggle government projects. From Gleckman:

The fiscal plan is actually a mix of small-bore tax cuts and tax increases. True, he’d eliminate preferences for oil, gas, and coal and for some activities of multinational corporations. But he’d also create, extend, or expand a whole host of other tax subsidies. There are new tax credits for investments in green energy and energy-efficient commercial buildings. There are $2.5 billion in new tax breaks for businesses in “designated growth zones.” That’s on top of an additional $1.8 billion in “New Markets” tax credits and $2 billion in special tax breaks for transit projects in New York City.
And there’s more. He’d expand and make permanent the research and experimentation (usually called the R&D) tax credit, at a cost of $100 billion over 10 years. This even through the evidence suggests that while the credit results in cost shifting within companies, it does relatively little to encourage research that wouldn’t have been done anyway.
(...)
All of this is what my Tax Policy Center colleague Gene Steuerle long-ago dubbed tax deform. Instead of broadening the tax base and getting government out of economic decision making, Obama is proposing to narrow the base and wade hip-deep into those choices. For Obama, fossil fuels are bad, alternative energy is good. So he takes away the oil and coal subsidies but adds new ones for solar and wind. (emphasis mine)

Let's be clear. Tax deductions and credits, whether for oil drilling or wind farms, encourages resources to flow in directions they might not in a free market. That's because they reduce the tax burden, and thus the cost of production, for politically popular industries. Reason magazine and Reason.com have been all over the economically wasteful effects tax breaks have in the alternative energy market - there's no reason we shouldn't be equally suspicious of preferential treatment for traditional energy companies. Nor should we avoid applying the same principle to taxpayers, especially where employer provided health care and mortgages are concerned.

Without treading too far into the minefield of whether a tax break qualifies as a "subsidy", I think we can all agree that deductions and credits represent an attempt by government to push society's resources toward its preferred ends. This means that government not only picks winners and losers in the market (wind farms over oil companies, homeowners over renters) but habitually "nudges" consumers to buy those goods and services that the state thinks you should have. Such a policy doesn't make economic sense, certainly doesn't make budgetary sense and doesn't square with the philosophical underpinnings of free market ideology. Hopefully Congress, in reviewing the new tax breaks in the President's budget, will recognize this.


David Godow is Research Assistant


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