Charlie Leonard: Time to eliminate special treatment in tax code
August 10, 2011
On Monday, The New York Times editorial page called for ending tax subsidies for oil and ethanol companies. The Times editors argued that energy producers are big, profitable companies that have no more entitlement to big tax breaks than the rest of us.
When I read this, I wondered if the irony of his or her own situation was entirely lost on the Times writer who authored this bold call for a more level playing field in the tax code. After all, editors at the Times sit high above the Manhattan skyline in a glistening new $1 billion dollar headquarters that you can be sure is being fully depreciated under the tax code – reducing the Times’ current and future income tax bill by several hundred million dollars.
The fact is, we don’t need to just end tax breaks for energy companies, we need to eliminate every single credit, deduction and exemption in the tax code – including those enjoyed by The New York Times – and bar Congress from ever enacting another one.
Ever since the adoption of the 16th Amendment, which authorized a federal income tax in 1913, Congress has been doling out credits, deductions and exemptions to dozens and dozens of special interests.
Today, more than $1 trillion of individual and corporate income in the United States is exempted from taxation each year as a result of Congress picking winners and losers in the form of targeted tax breaks. It’s incredibly corrupt, grossly unfair and robs the economy of a whole range of productive pursuits.
During the recent Congressional debate over the debt ceiling, the “Gang of Six” U.S. senators, including three Republicans and three Democrats, tried but failed to pass a real debt reduction plan, including tax reform, that largely embraced the idea of eliminating deductions.
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What the “Gang of Six” found is that we could actually lower personal income tax rates across-the-board, from the current six brackets, down to just three, set the maximum income tax rate just 29 percent – and still generate more tax revenue than we do today. They also found you could lower the corporate tax rate from the current 35 percent to just between 23 to 29 percent, guarantee more revenue for the Treasury and never again have profitable corporations that pay no taxes.
(Helpful hint: This is not where you should pause and try to figure out if you personally come out a winner or a loser with a lower bracket and no deductions. That’s precisely the kind of myopic thinking that played a large part in getting us into this mess. This is the place where all of us should be thinking about the inequality of our tax code, genuine fairness and the fallibility of Congress).
Let me give you two more examples of why we need to wipe the slate clean of special tax treatments.
Mortgage interest and real estate tax deductions give the 66 percent of Americans who are homeowners a tax break for their housing expenses (i.e. mortgage interest and real estate taxes) under the tax code. The other 34 percent of Americans who rent get nothing.
Similarly, the president says it’s not fair that private jet owners get to take enormous deductions for the depreciation of their aircraft. I agree. However, unlike the president, I don’t think those deductions are wrong because these individuals and companies “can afford to pay more.” The New York Times can also “afford to pay more.” These deductions are wrong because they allow a certain class of people to lower their tax bills in a way that others cannot.
And this is why I fundamentally think we need to restore some semblance of the notion of equal protection of the law (as guaranteed by the 14th Amendment) to the tax code.
To be clear, I believe the reality is that it will always be necessary for us to maintain a progressive scale of rates in the tax code that taxes higher levels of income at higher rates – just like in the “Gang of Six” plan. My objection is allowing Congress to continue choosing winners and losers – within the brackets – that bestow special treatment on one group of Americans at the expense of another.
In my last column, I suggested that both liberals and conservatives needed to better understand that when either group encourages and legitimizes special treatment by Congress for causes they support, they are simultaneously helping to perpetuate an inherently dysfunctional and discriminatory political process. And nowhere is this truer than in the tax code.