Congress is poised to begin in earnest a debate on how to fix America’s broken taxation system. Reform is sorely needed, with the U.S. tax code notoriously convoluted, out of date and considered to by many to be a competitive disadvantage for American job providers.
At the center of this debate will be Sen. Max Baucus, the chief Senate architect of what will, hopefully, be bipartisan reform. Kudos to Baucus for taking an early, novel approach of starting the discussion with a “clean slate” — in other words, starting with the premise that we’ve repealed the entire tax code and we’re starting from scratch.
But beyond that, there appears to be a wide divide between Republicans who want to address the mounting tax burden faced by American job creators, and Democrats who are opposed to cutting taxes.
And complicating things is the inconsistent terminology being used by politicians and the media. In some cases I fear it’s being done to intentionally confuse things to suit a political agenda. Let’s get one thing straight: a “subsidy” and a “tax deduction” are not the same thing. Some have used the terms interchangeably, to the detriment of the open and honest debate we should be having about tax reform.
A “subsidy” is a direct payment by government to a firm or industry in order to prop it up. Typically, without the subsidy the firm/industry would not be viable on its own – in this case the government policy is to create a market opportunity where it wouldn’t otherwise exist. We’ve done this in the energy industry with things like solar and wind energy.
A “tax deduction” is completely different. A deduction doesn’t prop up a business; it simply ensures that businesses are only taxed on their real income. Businesses use deductions to write off their legitimate expenses so that taxes are calculated on their net income, not their overall revenue.
The policy objectives of deductions are to ensure fairness in the tax system, not to prop up any firm or industry. A good example of a deduction is the Section 199 Manufacturing Deduction that was put in place a decade ago to make sure that American companies were allowed to write off the costs of production so they could be competitive with foreign firms.
The distinctions between subsidies and deductions are fairly obvious. But how often do we hear the rhetoric about subsidies to oil companies, for example. In fact, oil companies don’t receive subsidies; what those rhetoricians are referring to are actually common, everyday tax deductions.
The next time you hear a politician or special interest group talk about “ending the subsidies for oil and natural gas companies,” take a moment to consider whether that industry actually receives government subsidies. With only a few notable exceptions, most industries do not.
Reform that doesn’t significantly simplify our tax system and reduce the tax burden isn’t real reform. But with an honest and open debate, I believe we can accomplish both, and in doing so strengthen our economy and put job creation back on track.
Rep. Alan Redfield, R-Livingston, serves on the House Taxation committee.
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