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Tax Credits: A False Love Affair Over the years I have heard politicians, both liberal and conservative, brag about the tax credits which they have gotten enacted into law. Liberals like tax credits to encourage various social policies which they think are good. Conservatives like tax credits for much the same reason, though the programs they encourage are different, and also because credits reduce taxes. This love affair with tax credits is misplaced, and politicians should quit using them for several reasons. Tax credits encourage actions which are often unnecessary. The various business tax credits provide a prime example. Most property for which there is a tax credit would be purchased anyway if the property were worthwhile. Often tax credits are provided for investments which, under certain circumstances, may be mandated, such as for equipment which reduces pollution. Tax credits also distort the cost of government. Since tax credits reduce taxes directly to the extent of the credit, the credits have the same effect as a payment from the government. Yet the use of credits cannot be monitored in the same manner as a direct payment, and the total cost is not known. Thus, the actual cost of government is not known and may be distorted. The actions encouraged are often not as productive as thought. Many hybrid vehicles do not perform as well as anticipated. Also, alternative energy sources are not now able to deliver environmentally positive results overall. Thus, an investment which does not result in the positive environmental impact expected is made without the return anticipated by the individual or business and all effectively underwritten by you and me who do not get the credits. Tax credits complicate the tax code unnecessarily. There are over 55 sections of the Internal Revenue Code dealing with over 45 different tax credits applicable to reduce income tax liability. Just about every state income tax code has various tax credits and rules which complicate their state codes. The sections and credits are expanding over time rather than contracting. Finally, since the credits effectively hide the cost of government, we do not know what is actually being supported and to what extent. You are providing a lot of support to programs about which you may have no knowledge, and which often do not need to be supported in this manner with the effect that those who do not get the credits are paying more taxes than might otherwise be needed. Thus, the love of tax credits for different purposes championed by politicians is false. It would be better to have a simpler tax code which is economically and socially neutral. |
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