TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 16, 2013

Fleischer: ‘Tax Extenders’ That Slip Under the Radar

NY Times DealBookNew York Times DealBook:  ‘Tax Extenders’ That Slip Under the Radar, by Victor Fleischer (Colorado):

The best tax loopholes hide in plain sight.

While the recent fiscal negotiations focused mostly on changes to the top income rate, the final bill (H.R. 8) contains a bonanza—52, to be exact—of what are known as “tax extenders.” The tax extenders are temporary or permanent extensions of special tax relief for particular industries or types of investments.

Congress likes these tax extenders, which have come to dominate the tax legislative process in recent years. The temporary nature of extenders reduces their estimated costs; budget estimates assume that the provisions will sunset as promised, instead of being extended each year, as most in fact are.

In addition to finessing the budget process, the annual ritual of enacting the tax extenders gives Congress a regular opportunity to check in on favored industries to see if they have been naughty or nice. As public scrutiny has led to a decline of direct spending in the form of earmarks, indirect spending through tax expenditures has become a more comfortable method of extracting campaign donations from industry and doling out tax breaks in return.

The worst tax extenders have gotten some unwanted media attention. These include the special expensing rules for film and television productions, NASCAR venues and rum production, and creative tax breaks for both fossil fuels and clean energy. But even the less offensive tax extenders, which tend to slip under the radar, are questionable from a tax policy perspective.

Consider the special provision for “qualified small business stock,” which provides a zero percent tax rate on capital gains from certain investments. A better name would be the “angel investor loophole.”

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