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Small Problems with the Tax Code Beg for a Large Solution

A list of the unintended consequences of well-meaning tax provisions could fill a book. For just one recent example, look at the addition of an “alternative energy credit” to the tax code. Shortly after the credit’s enactment, the IRS determined that the paper industry’s use of “black liquor" -- a paper-processing byproduct the industry had already used for decades to generate power -- qualified for it. Lawmakers neither intended nor foresaw this application of the credit, and enacted a provision to close this loophole, but not before the industry claimed a few billion dollars in the credits. Rather than merely clarifying the law, however, lawmakers deemed the "fix" a loophole-closer that would “raise” $23 billion in new revenue, thus permitting them to use it to “pay” for $23 billion in new spending.

The amount of tax revenue the U.S. Treasury loses by “hybrid mismatch arrangements” is small in the scheme of things -- roughly $175 million per year. Rather than spend a moment of effort to address OECD’s proposal, lawmakers need to resist the temptation to solve every perceived problem of social and economic behavior with a tax incentive or disincentive, and find the fortitude to create a tax code that looks, in the words of a former Treasury secretary, like it was designed on purpose.