Tuesday, July 2, 2013

Licensed to Kill?

The ongoing congressional push for tax reform continues to focus on tax breaks.  In a new twist, Senators Baucus and Hatch have asked their colleagues to provide a "pardon list" identifying those tax benefits worth sparing.

Two breaks that will appear nowhere on any pardon list are tax-free corporate reorganizations and international tax treaties.  That may sound encouragingis it possible that members of Congress will turn a deaf ear to the pleas of big corporations and powerful multinationals?but the truth offers little reason for optimism.

Those preferences, unlike charitable deductions and the exclusion for employer-provided health insurance, simply don't need a pardon.  Why not?  In effect, they have a license to kill.

Although—or, a cynic might suggest, because—both of these longstanding features of the tax law provide vast, open-ended benefits to the well-connected and influential, no uncomfortable questions ever get asked about the large sums of cash they deliver to taxpayers.  Their special status has decades-old roots in the design of what is known as the tax expenditure budget.  Not as comprehensive as it purports to be, that mechanism counts the cost of some tax breaks, but not all.  Those tax breaks not included on the tax expenditure budget escape all scrutiny during the budget process. 

Like Keyser Söze, and the devil before him, these tax breaks have managed to convince the world that they don't exist.  When Congress trains its big guns on tax breaks that benefit the old (like the additional standard deduction for elderly taxpayers) and the infirm (like the exclusion for workers compensation), don't forget the generous preferences they never mention.

2 comments:

  1. It will be interesting to see if Rand Paul's treaty blockage/holding effort in the medium to long term results in more Congressional scrutiny of tax treaties during the ratification process. In Canada for example the recent ratification of the Hong Kong Canada treaty took up four hearings in the Senate and two in the House of Commons. I don't think a US tax treaty has gotten that type of scrutiny in years. Now perhaps in Canada tax treaties deserve a high degree of scrutiny especially when you have prickly partners like Brazil, Hong Kong, and Singapore where just entering into a treaty with could be a significant fiscal drain(Yes Canada allows sparing credits with Brazil a big no no in the eyes of the US).

    I will also add after watching the hearings in Canada that Canadian MP's and Senators even after days of hearing still really don't have a true picture of how tax treaties work. For example there was very little if any discussion of the commentaries and what is contained in them. Simply an explanation from the Department of Finance that the OECD model makes life easier by pre-negotiating many of the terms.

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  2. I am not even sure that many tax law practitioners understand how tax treaties work, most especially how they ought to or will be interpreted and/or implemented either by competent authorities or by courts in either jurisdiction. It would surprise me very much if many politicians had even the barest of understanding.

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