Targeted tax breaks: Cluttering up the IRS code

Politicians for decades have used the tax code as a tool for social engineering – a means to discourage or encourage various behaviors or to reward favored constituencies.

That’s why the tax code – for both individuals and businesses – has become such a morass of complexity and inefficiency.

And the result?

Many companies are simply ignoring the corporate tax breaks and incentives that our beltway politicians pass in the name of invigorating the economy, The Wall Street Journal reported this week.

“I usually avoid these targeted tax incentives, because it costs so much just to be compliant that it’s not worth messing with,” John Raine, CEO of Raine Inc., an Indiana firm that manufactures belts and holsters for the military and other customers, told the Journal. “I can’t run a business based on what area the federal government is trying to juice.”

Tax consultants estimate that eligible businesses actually obtain as little as 5 percent of the main domestic tax breaks that they’re entitled to claim. Out of 1.78 million corporate tax returns in the U.S., only about 20,000 claimed any of the three dozen main business tax credits in the code, the IRS estimates.

One example of those too-complex-to-bother tax breaks is the Work Opportunity Credit. “The credit frequently goes unclaimed, largely because it is such a hassle,” The Journal reports. It requires extensive paperwork for each worker claimed, and that paperwork can often take a year or more to process. So Sarah Hamersma, a University of Florida professor, estimates that companies claim the credit for just 20 to 35 percent of all eligible workers.

In the latest global rankings of national tax systems by the World Bank and PricewaterhouseCoopers, the United States came in near the bottom – 142nd out of 183 countries – for the time it takes a hypothetical small manufacturer to calculate its corporate income tax.

Another targeted break identified by the Journal, the tax deduction for energy-efficient buildings, often requires computer modeling costing as much as $50,000. USAA Real Estate Co., a large building owner, tried “many, many times” to find renovation projects that could be supported by use of the deduction, says managing director Brenna Walraven. “In every case we modeled, (the benefit) was less than the $50,000 to $60,000. … In the last six months we haven’t even thought about it.”

To state the obvious, when the tax code is full of “targeted tax breaks” so cumbersome or expensive to use that businesses throw up their hands, the politicians who pretend those enactments are helping anyone – let alone the economy as a whole – are either liars or fools.

It’s too late for the hand shears. If some economic stimulus is desired, the number of pages in the tax code must be reduced significantly – and the instrument of choice must now be the chainsaw.