Tuesday, May 31, 2011

Tax Credits just don't work

Today, CNN Money confirmed what we already suspected - a double dip in home prices.  They even provided a nice chart.

This, after our government spending $15 billion on tax credits to prop up the real estate industry.  My question for you real estate pros is - how's that working out for you?  To make matters worse, SmartMoney.com reports that recipients of the credits saw their home values decrease at twice the rate of the credit. 

The entire purpose of a tax credit is to entice us to do something that we wouldn't otherwise do.  And the credit always fails.  Always. 

Here is a fresh idea - abolish all tax credits.  I know - insane, right?  What about the credit for insert-your-favorite-cause-here?

OK, I'll go first.  I like the credit for rehabilitation of historic structures.  My office is in a restored 1924 building in the middle of historic downtown Salisbury.  I love the concept of preserving beautiful old buildings.  I'm fortunate to live in a place that has such respect for history.  In fact, Salisbury is somewhat of a leader in historic rehabilitation.  But, I've found that many taxpayers who invest a substantial amount of money rehabilitating an historic structure discover that their credit is limited (sometimes to zero) by the Alternative Minimum Tax (AMT).  Without getting too technical about tax law, suffice it to say that the tax law giveth and the tax law taketh away. 

Lacking a perfect model for post-credit tax law, I offer Adam Smith's "four maxims of taxation" from Wealth of Nations, first published in 1776.  According to Smith, taxes should be:
1. Proportional
2. Transparent
3. Convenient, and
4. Efficient

How does current tax law rate according to those four concepts? 

Scott Hodge of the Tax Foundation said in his 5/2/11 testimony to the Senate Finance Committee "The proliferation of special interest tax preferences, the rising number of nonpayers, and the increasingly redistributable nature of the federal income tax all contribute toward a system that is geared more toward enacting social policy than raising revenue".

Is that what we want?


Eric said...


Lucy Merrill said...

How about eliminating the AMT? It was one of those good-sounding ideas that got smacked by the long arm of the law of unintended consequences.

Alan Rutherford said...

The short answer is $872B in lost revenues over the next 10 years.

A better answer - repeal not only AMT, but ALL credits and deductions! Replace it with a simple, predictable, transparent and efficient tax system. Now THAT would be tax reform! More reading here ... http://www.taxfoundation.org/publications/show/27099.html

Eric, thanks for the vote of confidence, but I think I just killed any chance of contributions from any special interest group!