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Free Money? Not Worth the Headache

In terms of inefficiency, the U.S. tax code stands as one of humanity’s most monumental accomplishments. It’s no secret that the tax code’s byzantine complexity harms small and medium-sized businesses more than large corporations. After all, bigger companies can afford the scores of lawyers and accountants needed to navigate the system — and for that matter, many of the arcane little exceptions and exemptions were written exactly to order thanks to the lobbyists they are able to deploy on Capitol Hill.

But the extent of the differential is truly dramatic. Consider this story in the WSJ that reports how a large number of companies actually forgo tax breaks because the cost of obtaining tax benefits is more expensive than the benefits themselves. According to the article, individuals and businesses are spending at least 1 percent of GDP just to make sure they’re doing everything by the book. As anxiety intensifies over tepid GDP growth and decreasing competitiveness, a percentage point counts for a lot.

To some businesses, tax cuts are just not worth the headaches. One credit for small businesses providing healthcare to their workers was available to between 1.4 million and four million businesses, but because the paperwork and calculations are so time-consuming, only 170,000 employers claimed the deduction. The Work Opportunity credit, which is supposed to reward companies that hire disadvantaged workers, such as ex-felons, teenage summer job seekers, or workers on welfare, is also vastly underused because the paperwork for each worker can take a year to process. That’s not worth the $2,400 tax break.

That leaves us with a scenario in which businesses take only 5 percent of the tax breaks for which they are eligible. There were 1.78 million corporate tax returns in the U.S. last year, and only 20,000 claimed any of the three dozen main business tax credits in the code.

The complexity of the country’s tax code has aroused concern from both Democrats and Republicans. President Obama proposed overhauling the tax code in his State of the Union address in February. Likewise, Governor Romney has called for a simplification of the tax code.

One big reason for the proliferation of U.S. tax breaks—which have doubled in number since 1987—is political: It’s a lot easier for elected officials to pursue policy goals through tax breaks than by easing corporate tax rates or relaxing the rules. That, and the way that the ability to write loopholes unlocks big campaign contributions from companies who know how the game is played.

A simpler code without the fancy social engineering bells and whistles is what this country needs. But to get that, we need something else: an honest and competent Congress that puts the public interest first.

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  • Josh

    Repeal the 16th Ammendment.

  • Kris

    “the tax code’s byzantine complexity”

    Could someone help me out? No matter how hard I peer at the maps, I just can’t find Byzantium.

  • Anthony

    “…an honest and compent Congress that puts the public interest first.” Now, how do we proceed to bring about that reality in this wondrous democracy of ours?

  • Walter Sobchak

    Kris: Here it is:

    Once out of nature I shall never take
    My bodily form from any natural thing,
    But such a form as Grecian goldsmiths make
    Of hammered gold and gold enamelling
    To keep a drowsy Emperor awake;
    Or set upon a golden bough to sing
    To lords and ladies of Byzantium
    Of what is past, or passing, or to come.

  • Nathan


    The old Byzantine empire was formed from the breakup of the Romans. The territory they controlled varied greatly, but it generally lay in present-day Turkey and somewhat west of that. Its capital of Constantinople was somewhat more famous.

    Regarding the article: I remain skeptical of the chances of any sort of flat tax passing, but am very much in favor of tax code simplification. Also, we don’t need Congress to miraculously transform into a good fairy godmother to get it done…we just need the public to demand it of our politicians. That’s still a dramatically difficult task, but it remains in the realm of the possible.

  • Cory

    “an honest and competent Congress that puts the public interest first”.

    Great article as always. Before we can have an honest and competent Congress, we need a nation of people who will stop electing politicians with the goal of having them bring home the bacon.

    We are all opposed to bacon for causes we don’t agree with. The problem is we are all in favor of bacon for those causes we do agree with.

    Until enough of us decide to forgo the bacon all together, we won’t fix the mess.

  • Irish Mike

    To make Prof. Mead’s point: I once represented the owner of a property leased in part to a large retailer. The retailer was aware of a particular tax credit attributable to the property, but the credit only applied to companies employing a certain threshold of people (which, coincidentally, was only a little less than the average number of people employed by this tenant in its other stores). The tenant usually owned its own property, but because this property was leased, they needed our client’s consent to apply for the credit. In processing the application, the store’s attorney confided that his firm had actually drafted the tax credit in question. For reasons of size (and influence, apparently) the other stores leasing space on the property were not elegible for the credit, even if by some chance they were aware of it.

    I wonder – how many of the 18 small business tax breaks for which Mr. Obama is now taking credit have similar qualification hurdles, so as to benefit only those who share Mr. Obama’s policy objectives (green energy, union labor, etc.)? And how many of these same small business owners entitled to the credits are also, in Mr. Obama’s words, “not paying their fair share”?

  • Corlyss

    We will never have a simplified tax code for two reasons alone:

    1. I used to work for IRS. Back in the mid-90s, the share of the economy provided by 3rd party preparers was $256 BILLION. At that time the number of taxpayers who did their own taxes still exceeded 50%. Not any more. Now most rely on a 3rd party preparer. How much of the money going into the economy now do you suppose anyone in Congress is willing to sacrifice? There not enough simplified tax code lobbyists to offset those from the industry who remind Congress every time this subject comes up just how much $$ the latter will forfeit for the privilege of having citizens of ordinary intelligence do their own taxes.

    2. Congress is far too enamored of social tinkering thru the tax code to ever give up the power to control behavior thru it.

  • thibaud

    Agree on nearly all points.

    This is why we need to elect a man whose fortune was piled up in large measure by his gaming of the tax code.

    Sort of like putting Ghaddafi’s Libya on the U’s Human Rights Council, or making Larry Flynt the head of the Moral Majority.

    Who knows thine enemy better than thine enemy?

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