While no one likes making out a check to Uncle Sam, economists have yet another reason to feel pain come April 15. Professional number-crunchers are acutely aware of missteps, loopholes, and boondoggles that cost the federal government literally hundreds of billions each year"â?bits of misguided or poorly executed policy of which most Americans never know the impact.
Read on for the details of some of the biggest tax-code doozies and why they aren't going away any time soon.
Ethanol credits: Energy policy in the United States is a crazy quilt to begin with, and factoring in the carrots and sticks of tax incentives makes it exponentially more complicated. There's a lot of room for politically motivated legislation and for unintended consequences to crop up.
Ethanol was pitched as a kind of energy panacea back when President George W. Bush signed the Energy Policy Act of 2005, mandating an increase in the use of the corn-derived biofuel. Generous credits doled out to manufacturers and producers accelerated industry's initial embrace of ethanol, but the skeptics have gained the upper hand in this argument. Ethanol production has been fingered as one of the culprits in the spike in food prices a couple of years ago (tariffs kept the United States from using sugarcane-based ethanol from Latin America), and it turns out that making the stuff consumes a lot of the nonrenewable fuel its use was supposed to conserve. Nonetheless, alcohol-fuel credits will burn through some $12 billion between 2007 and next year.
A related energy subsidy meant to encourage the burning of biomass misfired even more spectacularly. Papermaking companies have always burned as fuel a byproduct of paper pulp-making known in the industry as "black liquor."? They wound up netting some $6.6 billion to throw some diesel into the mix, an unintended consequence of a 50-cents-per-gallon tax credit given to companies that blend renewable fuel sources into carbon-based ones. In some cases, the money paper companies got from the credit was more than the money they made manufacturing. In this case, Congress has been working overtime to scrap this provision; they added verbiage ending the paper industry's windfall into the health care bill that was recently signed into law.
Exemption for inherited stock-gains: Say, like Forrest Gump's buddy Lieutenant Dan, you had the foresight to buy Apple (AAPL) stock when it went public in 1980 at $22 a share. If you died last week when the stock was at $230.90 a share, whoever inherited it wouldn't have to pay capital gains on the increase, even if they turned around and sold it on the way to your funeral. To economists, this makes no sense, because if you'd sold that stock the day before your death, you would have had to pay capital gains. Tax planners even encourage elderly investors not to sell stock solely for the tax benefit it confers to their heirs.
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