Dear GOP: txax credits are not the answer.

AuthorDe Rugy, Veronique
PositionECONOMICS

IF YOU LIKE social engineering done through the tax code, you'll love the House Republicans' health care plan. It takes the refundable tax credit that Obam-acare provides to most people who get their coverage through a government-run insurance exchange and replaces it with a refundable tax credit available to anyone who buys a plan on the individual market. The bill, which has yet to make it to a floor vote, would if passed make our already nightmarish Internal Revenue Code even more complicated and tax season even more painful.

Regular tax credits allow an amount to be deducted directly from income taxes owed. Unfortunately, they're often poorly designed: They introduce unnecessary complexity and ambiguity to the tax code while usually failing to properly target the desired activity or population. In addition, while tax credits can seem lucrative to their recipients, they're often counterproductive for the economy as a whole.

Take, for example, the federal credit extended to U.S. companies for research and development. It is one of the largest corporate tax carve-outs in our tax code, amounting to about $9 billion a year. It's also an archetype for how these efforts can go wrong.

The benefits of the R&D credit are highly concentrated--the top 1 percent of American firms claim more than 82 percent of associated dollars. And because the design of the credit is so complex, companies must redirect scarce resources away from producing something of value to their customers and toward securing the handout. "Because the credit cannot be precisely defined, businesses are incentivized to spend large amounts of time and money lobbying Congress and tax regulators to ensure the credit is renewed and tailored to suit their specific interests," the Mercatus Center's Jason Fichtner and Adam Michel explained in a 2015 paper. "Significant resources are also wasted as parties attempt to interpret, litigate, and follow the law."

Despite the costs, there's no proof the R&D credit leads to significantly more or better innovations.

"Refundable" tax credits--the kind that become cash transfers from the government to people who don't owe any taxes--have all the same problems as regular tax credits, and on top of that require actual government outlays. According to a Congressional Budget Office report, the feds this year will receive $238 billion less than they otherwise...

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