Senator Jeff Flake (R-AZ) is generating some buzz for publishing a 56-page report on what he considers the most egregious preferences in the tax code. It never hurts to point out some of the worst, but Flake, perhaps unintentionally, is doing tax reform a disservice by focusing on a handful of relatively insignificant deductions and exclusions.
Tax breaks for alpaca farmers (or are they ranchers?) are amusing, and the cute cousins of llamas make for attention-getting pictures, but they are trivial compared to the real flaws in the tax code. It may be a good idea to shear alpaca shelters, deductions for telemarketers, subsidies for chicken poop, and tax-exempt bond financed mega malls and golf courses. But Congress could repeal them all and it would add little to quality of the revenue code—or to Treasury’s coffers.
That’s because the real problem isn’t silly little special interest tax breaks. Nor is it “loopholes,” a word that misleadingly implies that Congress could fix the tax code by simply eliminating those provisions that clever lawyers have learned to manipulate.
It is none of that. It is rather the trillion dollars-plus of annual tax breaks that Congress explicitly enacted to benefit nearly all Americans in one way or another. It is vastly bigger than a handful of city slickers taking advantage of the alpaca shelter. The real problems on the individual side of the tax code are preferences such as the mortgage interest deduction, the tax exclusion for employer-sponsored health insurance (ESI), and the multitudinous tax subsidies for many forms of saving.
Those tax preferences are where the money is, whether Congress wants to finance rate cuts, deficit reduction, or new spending. And they are where Congress should focus its reform efforts.
The relatively small amount of tax revenue lost by Flake’s targets signals how insignificant they are. His report listed seven preferences, which he labeled Tax Rackets. He could not provide revenue losses for three of them, probably because they are so small that no one calculates the cost. The other four run about $5.3 billion annually. Let’s round up and say the annual cost of these seven tax expenditures is $6 billion.
Contrast that to the mortgage interest deduction on owner-occupied homes, which will reduce federal revenue by nearly $70 billion this year. Or the ESI exclusion, which costs another $230 billion. Or the $200 billion in subsidies for retirement saving. For all the aggravation Congress would suffer by tackling the wasteful preferences Flake identified, the amount of money at stake is, by federal budget standards, loose change in the sofa cushions.
Then, there is the matter of his choices.
Sure, those alpacas are a tax shelter on the hoof. And, as Flake documents, they are often marketed that way. But, other than their attention-getting cuteness, how are they different from other tax give-aways for livestock? Years ago, I wrote a piece for Business Week about angora goats, another popular tax shelter. The magazine put the story on the cover, not because it was so good (though I thought it was) but because the goats were so funny-looking that they made a great picture.
We shouldn’t measure tax subsidies by how photogenic they are. If Flake wants to get rid of Sec. 179 immediate expensing and special capital gains rules for all livestock, he should say so. But why single out alpacas?
Flake’s heart may be in the right place, but I wish he’d focus on the tax code’s real problems. Then we’d have a chance at meaningful tax reform.
