The Tax Code is RIDICULOUS.
A peak into mayhem...
Our federal tax code is a disaster.
It's a bureaucratic nightmare, requiring armies of CPAs and lawyers to navigate. It's a damper on growth, imposing penalties on positive behaviors like research and offering harmful special breaks for bad things like coal extraction. It's a distributional mess, imposing higher rates across the board to make room for an endless litany of lobbyist-extracted carveouts and loopholes. Worst yet, it's not getting better; it's getting worse.
Politicians of all stripes are constantly promising even more complexity on the campaign trail. There is little more fashionable on the Hill than a new tax credit, deductions, exclusion, or exemption. These tax expenditures (as they are collectively called) never cease to fail to solve the problem they are aimed at, yet have been deployed ambitious and bipartisanly for decades.
To point to one timely example, our newly elected President Trump proudly campaigned on creating new exclusions for overtime pay, tips, and even things as marginal and specific as car payments. Needless to say, these changes would add more intricacies to our already endlessly spanning pages of code.
Earlier today, I was pondering this fact as a thought jumped into my mind: "I wonder exactly how many tax expenditures there are and how much they cost in total?" It didn't take long for me to find the answer. Thankfully, the Department of Treasury makes the data on tax expenditures readily available on its website.
From their data, there appear to be 169 tax expenditures in total, costing the United States over $1.5 trillion dollars last year. This is a truly whopping sum—nearly equivalent in size to Social Security. I've listed them here so you can look at each one for yourself.
Exclusion of employer contributions for medical insurance premiums and medical care - $215.860 billion
Exclusion of net imputed rental income - $147.240 billion
Defined contribution employer plans - $133.860 billion.
Capital gains (except agriculture, timber, iron ore, and coal) - $115.630 billion
Deductibility of charitable contributions other than education and health - $47.410 billion
Deductibility of mortgage interest on owner-occupied homes - $31.820 billion
Deductibility of nonbusiness State and local taxes other than on owner-occupied homes - $7.030 billion
Defined benefit employer plans - $70.100 billion.
Capital gains exclusion on home sales - $54.410 billion
Self-Employed plans - $43.180 billion
Treatment of qualified dividends - $35.880 billion
Step-up basis of capital gains at death - $49.240 billion
Individual Retirement Accounts - $32.690 billion
Reduced tax rate on active income of controlled foreign corporations (normal tax method) - $45.190 billion
Deductibility of State and local property tax on owner-occupied homes - $6.910 billion
Social Security benefits for retired and disabled workers and spouses, dependents, and survivors - $30.700 billion
Credit for increasing research activities - $28.220 billion
Exclusion of interest on public purpose State and local bonds - $29.810 billion
Energy production credit - $7.450 billion
Child credit - $67.520 billion
Deductibility of medical expenses - $12.260 billion
Exclusion of life insurance death benefits - $15.320 billion
Exclusion of benefits and allowances to armed forces personnel - $15.990 billion
Medical Savings Accounts / Health Savings Accounts - $12.830 billion
Exclusion of veterans death benefits and disability compensation - $11.640 billion
Credit for low-income housing investments - $12.800 billion
Allow 20-percent deduction to certain pass-through income - $37.240 billion.
Energy investment credit - $25.970 billion
Self-employed medical insurance premiums - $8.150 billion
Deductibility of charitable contributions to health institutions - $9.000 billion
Tax credits for post-secondary education expenses - $13.940 billion
Refundable Premium Assistance Tax Credit - $15.047 billion
Deduction for foreign-derived intangible income derived from trade or business within the United States - $15.240 billion
Tax credits for clean vehicles - $10.560 billion
Deductibility of charitable contributions to educational institutions - $6.230 billion
Exclusion of interest spread of financial institutions - $11.100 billion
Qualified tuition programs (includes Education IRA) - $3.020 billion
Exclusion of employee meals and lodging (other than military) - $7.530 billion
Exclusion of workers' compensation benefits - $8.870 billion
Additional deduction for the elderly - $7.540 billion
Exclusion of scholarship and fellowship income (normal tax method) - $4.430 billion
Carryover basis of capital gains on gifts - $4.590 billion
Parental personal exemption for students age 19 or over - $2.210 billion.
Exclusion of income earned abroad by U.S. citizens - $5.420 billion
Deferral of capital gains from like-kind exchanges - $4.020 billion
Credit for residential energy efficient property - $7.090 billion
Accelerated depreciation on rental housing (normal tax method) - $2.440 billion
Exception from passive loss rules for $25,000 of rental loss - $5.470 billion
Earned income tax credit - $2.700 billion
Premiums on group term life insurance - $3.440 billion
Advanced manufacturing production credit - $0.430 billion
Clean hydrogen production credit - $0.340 billion
Credit for child and dependent care expenses - $3.480 billion
Carbon oxide sequestration credit - $0.330 billion
Exemption of credit union income - $2.970 billion
Tax credit for orphan drug research - $1.740 billion
Low and moderate-income savers credit - $1.860 billion
Exclusion of interest on hospital construction bonds - $3.120 billion
Deductibility of student-loan interest - $0.560 billion
Interest Charge Domestic International Sales Corporations (IC-DISCs) - $1.620 billion
Exclusion of reimbursed employee parking expenses - $1.827 billion
Capital gains exclusion of small corporation stock - $1.780 billion
Exclusion of interest on bonds for private nonprofit educational facilities - $2.280 billion
Capital gains treatment of certain agriculture income - $1.550 billion
Premiums on accident and disability insurance - $1.720 billion
Deferral of income from installment sales - $1.750 billion
Credit for certain employer contributions to social security - $1.520 billion
Clean fuel production credit - $0.000 billion
Income of trusts to finance voluntary employee benefits associations - $1.500 billion
Exclusion of GI bill benefits - $1.460 billion.
Exclusion of employer-provided educational assistance - $1.660 billion
Excess of percentage over cost depletion, oil, and gas - $1.530 billion
Exemption or special alternative tax for small property and casualty insurance companies - $1.400 billion
Exclusion of interest on rental housing bonds - $1.610 billion
Employer-provided child care exclusion - $0.760 billion.
Exclusion of parsonage allowances - $0.959 billion
Credit for energy efficiency improvements to existing homes - $1.970 billion
Assistance for adopted foster children - $0.880 billion
Tax credits for refueling property - $0.170 billion
Exclusion of interest for airport, dock, and similar bonds - $1.050 billion
New markets tax credit - $1.210 billion
Adoption credit and exclusion - $0.870 billion
Deductibility of casualty losses - $0.000 billion
Exclusion of public assistance benefits (normal tax method) - $0.760 billion
Exclusion of interest on owner-occupied mortgage subsidy bonds - $0.880 billion
Exclusion of certain foster care payments - $0.500 billion
Deferral of interest on U.S. savings bonds - $0.820 billion
Advanced energy property credit - $0.260 billion
Work opportunity tax credit - $2.070 billion
Tax incentives for preservation of historic structures - $0.710 billion
Allowance of deduction for certain energy-efficient commercial building property - $0.430 billion
Distributions from retirement plans for premiums for health and long-term care insurance - $0.470 billion
Special Blue Cross/Blue Shield tax benefits - $0.370 billion
Exclusion for employer-provided transit passes - $0.369 billion.
Tax exemption of insurance income earned by tax-exempt organizations - $0.370 billion
Exclusion of certain allowances for Federal employees abroad - $0.280 billion
Qualified school construction bonds - $0.490 billion
Depreciation of buildings other than rental housing (normal tax method) - $0.920 billion
Excess of percentage over cost depletion, nonfuel minerals - $0.310 billion
Zero-emission nuclear power production credit - $0.000 billion
Expensing of certain multiperiod production costs - $0.250 billion
Expensing of multiperiod timber growing costs - $0.260 billion
Exclusion of interest on bonds for water, sewage, and hazardous waste facilities - $0.290 billion
Exclusion of military disability pensions - $0.200 billion
Special Employee Stock Ownership Plan (ESOP) rules - $0.220 billion
Discharge of student loan indebtedness - $0.100 billion
Small employer pension plan startup credit - $0.000 billion
Credit for construction of new energy-efficient homes - $0.280 billion
Income averaging for farmers - $0.210 billion
Exclusion of railroad retirement (Social Security equivalent) benefits - $0.300 billion
Capital gains treatment of certain timber income - $0.150 billion
Exclusion of veterans pensions - $0.220 billion
Advanced nuclear power production credit - $0.030
Expensing of exploration and development costs, oil and gas - $0.700 billion
Special deduction for teacher expenses - $0.160 billion
Reduced tax rate for nuclear decommissioning funds - $0.120 billion
Amortize all geological and geophysical expenditures over 2 years - $0.140 billion.
Exclusion of interest on student-loan bonds - $0.150 billion
Expensing of certain capital outlays - $0.120 billion.
Excess of percentage over cost depletion, coal - $0.090 billion
Recovery rebate credits - $3.460 billion
Exemption of certain mutuals' and cooperatives' income - $0.100 billion
Exclusion of interest on bonds for Highway Projects and rail-truck transfer facilities - $0.140 billion
Tonnage tax - $0.100 billion
Marginal wells credit - $0.190 billion
Ordinary income treatment of loss from small business corporation stock sale - $0.070 billion
Expensing of reforestation expenditures - $0.060 billion
Exceptions from imputed interest rules - $0.060 billion
Exclusion of interest on veterans housing bonds - $0.080 billion
Credit for holding clean renewable energy bonds - $0.070 billion
Treatment of loans forgiven for solvent farmers - $0.060 billion
Exclusion of interest on small issue bonds - $0.060 billion
Deduction for endangered species recovery expenditures - $0.030 billion
Credit to holders of Gulf and Midwest Tax Credit Bonds - $0.100 billion
Additional deduction for the blind - $0.050 billion
Income of trusts to finance supplementary unemployment benefits - $0.040 billion
Recovery Zone Bonds - $0.090 billion
Capital gains treatment of royalties on coal - $0.050 billion
Exclusion of interest on savings bonds redeemed to finance educational expenses - $0.040 billion
Empowerment zones - $0.090 billion
Credit for holders of zone academy bonds - $0.090 billion
Discharge of business indebtedness - -$0.010 billion
Exclusion of utility conservation subsidies - $0.050 billion
Discharge of mortgage indebtedness - $0.220 billion
Qualified energy conservation bonds - $0.030 billion
Employer-provided child care credit - $0.020 billion
Tax credit for certain expenditures for maintaining railroad tracks - $0.130 billion
Deferral of gain on sale of farm refiners - $0.015 billion
Expensing of exploration and development costs, nonfuel minerals - $0.070 billion
Disaster employee retention credit - $0.050 billion
Expensing of exploration and development costs, coal - $0.050 billion
Exclusion of special benefits for disabled coal miners - $0.020 billion
Indian employment credit - $0.030 billion
Exception from passive loss limitation for working interests in oil and gas properties - $0.010 billion
Deferral of tax on shipping companies - $0.010 billion
Tribal Economic Development Bonds - $0.010 billion
Credit for disabled access expenditures - $0.010 billion
Exclusion of interest on energy facility bonds - $0.000 billion
Alcohol fuel credits - $0.020 billion
Bio-diesel and small agri-biodiesel producer tax credits - $0.020 billion
Credit for employee health insurance expenses of small business - $0.010 billion
Enhanced oil recovery credit - $0.000 billion
Credit for family and sick leave taken by self-employed individuals - $0.520 billion
Other Dependent Tax Credit - $0.000 billion
Build America Bonds - $0.000 billion.
Special rules for certain film and TV production - $0.100 billion
Opportunity Zones - $2.080 billion
Accelerated depreciation of machinery and equipment (normal tax method) - $10.430 billion
Expensing of research and experimentation expenditures (normal tax method) - -$38.660 billion
Clearly, not all of these can or should be eliminated, but the vast majority should. To point to just three opportunities for consolidation:
Our fragmented array of complicated healthcare tax breaks, which are far from guaranteeing universal affordable access to care, would be better replaced with a single simple health insurance subsidy, done external to the tax code.
Our various accelerated depreciation schemes and special investment tax breaks would be best replaced by a blanket deduction for all investment costs of all varieties (full expensing).
Our litany of tax exclusions for government-provided benefits would be better replaced by a single large tax exclusion for all government-provided entitlement benefits.
Simplicity does not require us to abandon the aspirations of our tax code, nor does it require us to give up progressive tax brackets, as many on the right have claimed. What it requires is taking up a large and politically challenging task, one that will put us at odds with a powerful army of special interest groups.
Difficult as that might be, it's a worthwhile priority and one essential for curbing the unsustainable budget deficit we are currently faced with.
Nothing is certain, save for death and taxes. 100 percent agreed with you Micah. There is simply no reason to further "complexify" an already unfathomably complex tax code.
At this point, it doesn't appear that anyone has the gumption to do what is necessary and set the code on fire and start anew.
We best ought to begin moving to consumption taxation and reducing tax on production. A VAT would be a good place to start, alongside an LVT. Simpler administration, harder to evade, and more economically efficient on several fronts.
HOLY! MOLY! Thank YOU! A Billion times over!