Obama Administration Turns Tax Breaks into Burdens

After 41 months of unemployment above 8% — the longest streak since the Great Depression — even the Obama Administration is grumblingly admitting that heavy corporate taxes are obstacles to job creation. Unfortunately, The Nanny State can’t resist using tax breaks to micromanage businesses, and businesses are saying “No thanks” to the tax breaks that are intended to jump-start the economy.
Executives, particularly at small and medium-size companies, complain that many of the tax deductions are either too cumbersome or too confusing.

In some cases, the cost of obtaining the tax benefit is greater than the benefit itself.

And the Wall Street Journal is reporting that the threat of pushback from the IRS is causing many businesses to think twice before taking advantage of certain tax breaks.

These bureaucratic speed bumps are unintentionally creating new jobs: a cottage industry of new tax-credit consultants.

One example is the federal “Work Opportunity” credit, designed to reward companies for hiring workers from several disadvantaged groups. The break typically lowers a company’s taxes by up to $2,400 per employee. For businesses hiring unemployed veterans, it can be worth as much as $9,600 per worker. But many businesses turn down this credit because it is such a hassle. It comes with extensive paperwork for each claimed worker, and the paperwork can often take a year or more to process. Preparing the paperwork can be so costly that Sarah Hamersma, a University of Florida professor, estimates that companies claim the credit for just 20 percent to 35 percent of all eligible workers.

Many companies are turning their backs on Obama Administration incentives, and are actually paying more taxes than legally required. And corporate breaks that Washington hopes will boost the economy are often short-circuited.

  • Tax consultants estimate that eligible businesses obtain as little as 5 percent of the main domestic tax breaks that they are entitled to claim.
  • That means firms are leaving tens of billions of dollars on the table every year.
  • Out of 1.78 million corporate tax returns in the United States, only about 20,000 claimed any of the three dozen main business tax credits in the code, according to IRS estimates.

As a result, simplification of the corporate tax code has become a bipartisan rallying cry.

Why can’t Washington get it right? In part, both the White House and Congress use tax breaks to satisfy their own competing goals. And once a break is created, the IRS feels it must issue mountains of rules to prevent people from taking inappropriate advantage of the tax break.

In the latest global rankings of national tax systems by the World Bank and PricewaterhouseCoopers, the United States came behind 41 other countries for the time it takes a hypothetical small manufacturer to calculate its corporate income tax. Time is money.

Source: John D. McKinnon, “Firms Pass up Tax Breaks, Citing Hassles, Complexity,” Wall Street Journal (July 22, 2012).