Special Interest Tax Breaks Highlight Problems In Federal Tax Code

December 13, 2013

By Wesley Coopersmith

In his influential book The Rise and Decline of Nations, Yale University economist Mancur Olson explores the reasons why once-prosperous countries fall into economic stagnation and ultimately collapse. Journalist Jonathan Rauch built upon Olson’s theory, explaining that wealthy countries decline when their society ceases creative production and instead turns to government lobbying and rent-seeking. When businesses turn their investments away from the private sector to government lobbying, economic growth stagnates.

Unfortunately, we see signs of this parasite economy in federal government today. Too many businesses are finding government-supplied monopoly, subsidy, or tax break as a smarter investment than expansion by traditional means in the private sector. Sadly, it’s not just businesses that fight for a piece of the taxpayer-funded government revenue stream. Politicians, Democrat and Republican, enact legislation that benefits their constituency at the expense of the country.

One case in point is the cornucopia of narrowly-focused tax breaks that clutter the federal tax code.

Usually this time of year, Congress passes legislation that renews targeted tax breaks scheduled to expire at the end of the year. This legislation is commonly called an “extenders” package. I like to call it Congress’ Christmas gift to itself.

About 55 separate tax breaks (extenders) are set to expire at the end of the year, most of which are so narrowly focused as to only benefit specific demographics or areas of the country. Some of these include the research and development credit, college tuition deductions, the credit for energy efficient appliances, the tax credit for electric vehicles, commuter tax credits, and tax breaks on the donation of conservation property. Several of the expiring tax breaks are downright outrageous—such as those for racehorses in Kentucky, NASCAR tracks in Kansas, and Puerto Rican rum.

These specialized tax breaks come at a steep price. According to the Congressional Budget Office, the cost of extending all expiring tax provisions from 2014-2023 would come close to $1 trillion dollars. One specific tax break set to expire is the Production Tax Credit (PTC) for the wind industry. As I have previously written, the PTC is predicted to cost the American taxpayer $12 billion in 2014 if extended.

The cost of lobbying for these specialized tax breaks is also costly. Money spent on lobbying last year totaled $3.31 billion. Imagine if that money had been spent toward growing the economy instead of tapping government’s revenue stream.

A federal tax code that allows special interest groups and their friends on Capitol Hill to pick the winners and losers in our society is unfair to American taxpayers. Why should their hard earned tax dollars go to help some person in Kentucky buy a racehorse? It shouldn’t, but as long as government collects taxes, it will be a source of revenue for people to take from. So what’s the solution?

Congress must reform the federal tax code so that rates are low and neutral. This will help prevent the flow of specialized tax breaks to industries that are politically connected or Congressmen who have greater political influence. This will also encourage businesses to save and invest in the private sector, rather than in government lobbying. Tax extenders encourage the taking of the proverbial economic pie rather than the expansion of that pie. A low and neutral federal tax code will reverse this trend.

If Congress is serious about creating an environment that encourages creative innovation and economic prosperity, then it must reform our broken tax code. Opposing extending targeted tax breaks for special interests is just a first step in the right direction.

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