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Political Editors / January 26, 2022

In Brief: Most Tax Credits Are Bad Tax Policy

Congress shouldn’t renew temporary tax credits that expired in 2021.

Everyone loves a good tax credit, but Preston Brashers, tax policy analyst at The Heritage Foundation, says there isn’t really a good reason for most of them.

Conservatives in Congress face a false choice: Extend unwarranted tax breaks to a few politically favored entities or allow the federal government to collect even more taxes to feed more reckless government spending.

From that lens, it’s unsurprising that some choose to renew the tax breaks, even though it goes against a fundamental principle of prohibiting government from picking economic winners and losers.

But conservative members of Congress must recognize that if the federal government stays on its current path — having accumulated $6.6 trillion of new debt in the last two years alone — they’ll get the worst of both worlds. Unsustainable budget deficits will wrongly push Congress to dramatically increase taxes while the U.S. tax code remains littered with tax breaks for a favored few.

Obviously, Brashers writes, spending is the biggest issue. But tax credits play a huge role in the shape of economic activity, and he says that should be addressed:

Congress should not renew the temporary tax credits that expired in late 2021. Every tax credit that Congress extends to a chosen few ensures that every other taxpayer will be stuck paying more.

There are 25 temporary tax credits that expired in late 2021, including temporary expansions of existing credits. Some of the tax credits originated with the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act or the 2021 American Rescue Plan Act. Other “temporary” tax credits have their roots in Great Recession-era stimulus bills.

If history repeats itself, Congress will consider retroactively renewing many of these tax credits for one or more years.

Why are these a problem? He explains:

Most tax credits create major economic distortions by pushing individuals and businesses into economic decisions just for the large tax benefits they can receive.

Tax credits are usually arbitrary, with amounts, percentages, and limits set by policymakers making finger-in-the-wind judgments with little to no economic basis. Because tax credits are haphazardly created, they are easily manipulated and are a favorite tool of lobbyists and policymakers with a penchant for central planning.

Many of these fall into the environmental policy category, creating favoritism of one kind of energy or car over other kinds. Others favor one kind of economic activity over alternatives, including family choices. Brashers sums it up:

In general, temporary tax credits don’t offer the widespread tax relief that policymakers should seek. Indeed, with $29.7 trillion of debt and counting, unless combined with spending cuts, tax credits merely shift the burden of taxes to all those taxpayers who don’t qualify for them.

Tax credits distort markets by having the government pick winners that it will subsidize and making losers out of the rest, by artificially changing market prices, and by pushing consumers to buy products the government prefers rather than the ones consumers prefer.

Tax credits also allow those individuals and businesses receiving them to avoid the pain of certain taxes, often lulling them into supporting more big government while everyone else is left to pick up an even larger tab.

Read the whole thing here.

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