NEW CONGRESS SHOULD CALL TRUCE ON TAX CREDITS
January 2, 2007
Special tax breaks are a major factor contributing to the Byzantine complexity of the tax code. Moreover, they steer private resources in the direction that politicians favor, rather than the marketplace. And by carving up the tax base, they force up tax rates on the rest of us and serve as a roadblock to fundamental tax reform, says Scott Hodge, president of the Tax Foundation.
One of these -- the Republican sponsored Child Tax Credit -- was enacted with the best of intentions, however, the tax credit has knocked millions of taxpayers off the tax rolls and deepened the divide between Americans with "skin in the game" and those without:
- Today, there are more than 43 million households that file a tax return but have no tax liability after they have taken advantage of all of the credits and deductions available to them.
- That's a 50 percent increase in the number of "nonpayers" since 2000, and many of these households also receive generous cash benefits back through provisions such as the Earned Income Tax Credit.
- Because of growing tax credits, the IRS has become an important component of the modern "welfare state," distributing nearly $50 billion in credits per year.
Republicans have tried to solve other problems with tax credits, says Hodge:
- For example, the Energy Policy Act of 2005 authorized $1.65 billion in tax credits for "clean" coal projects.
- The IRS and Department of Energy recently announced $1 billion in tax credits to just nine companies.
- A total of 49 companies applied for the credits, but the Department of Energy -- rather than the marketplace -- determined that just nine winners had the right technology to qualify.
Source: Scott A. Hodge, "New Congress Should Call Truce on Tax Credits," Tax Foundation, December 28, 2006.
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