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POLITICS

Using tax code to modify behavior is a boon for big business, lawyers, lobbyists

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Politics,Beltway Confidential,Timothy P. Carney

The hip new bipartisan way for government to try to steer the economy and subsidize favored industries or companies is through tax deductions and credits. As with most government meddling in the economy, the benefit accrues disproportionately to large, politically connected businesses.

Today’s Wall Street Journal has a great piece [behind a paywall, alas] on this. The crux, with my emphases added:

[E]xecutives, particularly at small and medium-size companies, complain that many of the tax deductions are either too cumbersome or too confusing. In some cases, the cost of obtaining the tax benefit is greater than the benefit itself….

“I usually avoid these targeted tax incentives, because it costs so much just to be compliant that it’s not worth messing with,” says John Raine, CEO of Raine Inc….

Both sides agree the code’s complexity is unfair: While small and medium-size companies such as Raine forgo the headaches and the tax savings, bigger companies can more easily afford the specialized accountants and lawyers needed to claim the best breaks and gain a cost advantage.

Raine Inc isn’t going to jump through the IRS’s hoops (hoops that may be very necessary in order to avoid fraud), but General Electric sure will. Remember, GE employs 975 people in its tax department, which is directly related to its $0 bill for federal corporate income taxes in 2011.

Those 975 people GE are employing to minimize GE’s tax burden are helping GE’s shareholders, but unlike GE’s scientists, salesmen, et cetera, the tax guys are not really producing anything of value. You see the problem here: profit gets divorced from value creation. This undermines the functioning of the market economy. It also favors big over small, obviously. Which leads to the question posed in the WSJ piece:

So if everybody agrees complexity is a pain, why does it persist?

I’ve got a few answers. Here are two:

1) The big guys don’t find it as much of a pain as the little guys. This gives the big guys an advantage, and the big guys have better lobbyists.

2) Lobbyists, accountants, and lawyers all obviously benefit from this regime. They are the means by which the business owners interact with policy. It’s the principal-agent problem: the agents benefit from the complexity that harms their principals.

 

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