Any time you hear that congressional Republicans worked out a deal with Harry Reid on something, run. You know it can't be anything but a disaster. In this case, we're talking about the continuation of many disasters that have been with us for quite some time - an extension of various and sundry tax breaks for favored constituencies of Washington politicians. These breaks are always "temporary" favors granted for one year, and they are always extended at the end of the year for an additional year, which means that every Christmas politicians get to play Santa Claus.
But this year the Grinch comes in the form of Barack Obama, who is threatening to veto the bill because he doesn't like any tax break given to business for any reason. And that, argues the Wall Street Journal, provides an opportunity for the incoming Republican Congress to do something truly worthwhile. They can wipe out the special tax breaks altogether and adopt a new corporate tax code that levies far less than the 35 percent we see today, without giving special exemptions for politicians' friends and favored constituencies:
A particularly egregious example this year is the wind-production tax credit, a “temporary” handout from 1992. That subsidy guarantees wind companies 2.3 cents per killowatt hour of electricity produced; the payments continue for 10 years from the moment a company is eligible. So every time Congress extends the credit a year, they are committing taxpayer dollars for another decade.
Republicans could have let this atrocity expire at the end of 2013, but they re-upped and today the wind credit is by far the most expensive item in the tax extender package. It’s $9.58 billion price tag is 21% of the bill’s $44.7 billion cost, all for an “infant” industry that is today throwing money at utility-scale projects in nearly every state.
Before Mr. Obama’s veto threat, Republicans had also agreed to make permanent such boondoggles as New York Senator Chuck Schumer’s tax perk for mass-transit commuters and Mr. Obama’s stimulus-era college tax credit. That’s how you reach a cost of $450 billion over 10 years—all of which was going to be added to the deficit.
This distasteful exercise underscores the need for corporate tax reform. The real Republican goal should be a change in law that locks in lower rates and eliminates as many special tax breaks as possible—and doesn’t expire. No law is truly permanent, but Congress can make it harder to change by requiring a new Congress to pass a new statute to do so. Even Mr. Obama claims to support that kind of reform, so it may be the one big pro-growth achievement that Republicans can get in the 114th Congress.
It makes little sense for Republicans to make concessions now to a lame-duck Democratic Senate. The tax extenders bill echoes the Tom DeLay era, when Republicans thought their main duty was serving K Street lobbyists in return for campaign funds that would protect their majority. We saw how that worked in 2006 amid the meltdown over spending earmarks and Jack Abramoff. The GOP lost control of the House to the Nancy Pelosi Democrats.
A tax code chock full of exemptions is one of the ways the federal government empowers itself (through the IRS, especially) to exercise control over what happens in America. Oh sure, you have the freedom to do whatever you want, but your tax rate will be 35 percent, thank you very much. If you'd like a lower tax rate, you will do as we say, and the IRS will be paying close attention to make sure you do.
Simplifying the tax code with a much lower rate and few or no exemptions would unleash American business to grow and prosper without constantly having to look over its shoulder to make sure it's not displeasing the IRS. It would also deny politicians the ability to curry favor with the business community by doling out the much-sought-after exemptions.
Liberals often argue that the 35 percent corporate tax rate is really a mirage because almost no one actually pays that amount, given all the exemptions available. That is not an argue in favor of the current system. We should have a corporate tax code in which everyone pays the same amount regardless of what they do or where they do it, not one that empowers politicians and bureaucrats to decide who pays and who doesn't.
The track record of congressional Republicans on this issue is sadly not promising, since they have enjoyed doling out the exemptions as much as their Democrat counterparts. In its editorial, the Journal acknowledges that it may be hoping for too much to think McConnell, Boehner and company would really take true reform seriously.
But they should. This idea is what the boss's 9-9-9 plan was all about, by the way. You have a very small number of taxes with very low rates, and few or no exemptions. That would serve as powerful fuel for economic growth and freedom. So if Obama doesn't want to approve all these tax breaks for another year, fine. Give him something different altogether.
