I think that often, there is some common sense consideration of tax policy before enacting or changing tax rules. One example was the 1954 decision to enact IRC section 174 to allow for expensing of R&D expenditures. That simplified the law to avoid uncertainties and taxpayer/IRS disputes on the life for amortization purposes of these expenses. It also incentivized these expenditures that also benefit the economy through new technologies to improve our lives. I’m sure we can find more recent examples too.
Of course, before leaving my example, I should note that the 2017 Tax Cuts and Jobs Act modified the R&D expensing rule starting after 2021 to require R&D expenditures to be capitalized each year and amortized over 5 years (15 years for foreign R&D). That’s an odd provision for a piece of legislation intended to improve international competitiveness of our tax system when most other countries have research incentives in their tax law, but oh well. (I think we’ll see this rule forever postponed and hopefully repealed at some point to go back to expensing.)
I want to draw attention to the numerous places in our tax laws where tax breaks are provided for people who don’t need them. By tax breaks, I mean provisions that are not part of the “normal” structure of a particular type of tax (such as a mortgage interest deduction in a personal income tax or an exemption for digital books in a sales tax). For example, the American Opportunity Tax Credit worth $2,500 of tax savings per college student per year for each of the first four years of college is available to taxpayers with up to $180,000 of income if married ($90,000 single). This is beyond the income level that would qualify for a needs based scholarship. So why provide a government subsidy to people who don’t need it? (and that likely leads some colleges to increase student fees!) How might that money better help society and our economy by using the funds such as to increase the standard deduction and/or Pell grants?
There are many of these provisions in the law including the lower capital gains rate (20% maximum versus 37% maximum for non-capital gain income). One that I was reminded of recently in looking at updates for 2021 cars that qualify for perhaps up to a $7,500 credit for purchase of a new qualified plug-in electric drive motor vehicle (Code section 30D) is that the buyer of a MSRP $156,900 Bentley Motors Bentayga Hybrid SUV gets a $7,500 tax subsidy from the government – that is, all other taxpayers chip in a bit to help this buyer get the luxury car.
The credit exists to encourage car manufacturers to build electric and hybrid vehicles which they argue cost more so people don’t want to buy them; hence, the tax credit. But what happened to common sense? If someone is able and willing to spend over $150K on a car, will their decision be based on whether the federal government will give them $7,500? I don’t think so. The federal government with $27 trillion of debt is giving money to people who don’t need it. According to information on the donation website of one of my favorite charities – Sacred Heart in San Jose, $7,500 could instead provide 3,000 families with food including fresh fruit and vegetables for three days. (Per the Bentley website, $7,500 would also help cover the cost of the $8,500 rear seat entertainment center for one’s hybrid Bentley.)
How does this happen? How did this law get enacted years ago and remain unchanged without having a cap on the cost of the car?
What questions should we ask to help get government funds where they can provide the most benefit for our society and economy?
A requirement that before voting on a bill, the “cost” of all new and modified tax breaks be published for at least two days could help. The “cost” information should also include how the new or modified rule will be used by taxpayers in each quintile of income plus the top 1% and top 0.1%. This statement should also include why the provision is needed and why it needs to be in the tax law. For example, the AOTC funding could instead be used for existing programs such as the longstanding Pell grant program.
What do you think?