Taxing Times: A Discussion of Tax-Code Cronyism

On November 15, the Charles Koch Institute held an event on Capitol Hill entitled “Taxing Times: Ending Cronyism in the Code” to explore how our complicated tax code benefits politicians, lobbyists, and special interests.

Like any other form of corporate welfare, the government’s use of the tax code to play favorites creates a two-tiered society that helps the well-connected at everyone else’s expense.

The event, moderated by the Charles Koch Institute’s senior research fellow Dana Wade, brought together three expert panelists, namely Steve Ellis of Taxpayers for Common Sense, Veronique de Rugy of the Mercatus Center, and Tim Carney of the Washington Examiner and American Enterprise Institute.

To give a sense of some of the real costs of the tax code, Wade framed the discussion by stating that “Americans will spend about 8.9 billion hours complying with [the tax code] this year. That translates into about four million full-time jobs. … That’s about three times the active duty military of the United States.”

Carney then noted that the effects of tax-code cronyism go beyond what we can measure. As he explained, “When people talk about corporate welfare … and they point to the budgetary costs, they are missing the main point.” The real problem, he said, is the economic distortion that these special privileges create.

In the tax code, many of these special carve-outs for specific companies and industries occur through the almost annual process of extending “temporary” tax expenditures—known as tax extenders. While not every tax exemption is an example of cronyism, many of these tax extenders are specifically designed to benefit  politically connected industries.

“Historically, some of these provisions have been pretty good tax policy, in sort of mitigating the double taxation of income,” said de Rugy. However, today most of these extenders are very specific, indicating that they were created with particular firms or industries in mind.

Ellis gave a clear example of one such extender: the three-year depreciation for racehorses that are two years old or younger. Similar extenders the panelists discussed were the seven-year recovery period for motorsports complexes, the railroad-track maintenance credit, and the second-generation biofuel producer credit.

Beyond the economic inefficiency of these carve-outs, they are also inherently unfair, emphasized the panelists. There is no reason why an investment in a racehorse or a NASCAR track should receive preferential tax treatment, for example. Ultimately, as de Rugy highlighted, these loopholes weaken the incentive for meaningful tax reform, leaving those who are unable to lobby or hire expensive tax accountants at a serious disadvantage.

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