Growing Without Rain

News and Views about Taxes

Energy-efficient, tax-inefficient

with one comment

Scott Hodge of the Tax Foundation Tax Policy Blog (italics mine):

Bloomberg recently reported that:

“Whirlpool Corp. will claim $300 million this year in U.S. tax credits for making energy- efficient appliances, collecting almost four times the government’s estimate for what all companies would receive from the tax incentive.

The credit will generate about one-third of Whirlpool’s earnings this year, according to the company’s projections.

Company filings show that as of Dec. 31, 2010, Whirlpool had $555 million in stockpiled business credits and $2 billion in tax losses. Both can typically be used to offset up to 20 years of future income and taxes.”

There are so many issues raised by this story it is hard to know where to begin. But it provides a good learning moment for why we should not use the tax code to incentivize economic behavior – no matter how noble the cause.

I couldn’t agree more. Unfortunately, it’s all too easy for our elected representatives to give the appearance of doing something by inserting a preference into the tax code to achieve some desired behavior – only to find that it becomes difficult or impossible to sunset the preference later without blowing up someone’s means of livelihood.


Written by nctaxpro

February 24, 2011 at 12:12 pm

One Response

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  1. I agree that this particular example is very bad. I actually just wrote a blog post in which I criticize patchwork regulations of environmental issues.

    However, I think that Scott Hodge here is drawing false conclusions from faulty reasoning, when he says that the tax code should not be used to incentivize economic behavior. I disagree with this statement of his.

    What is the real problem here? Is the problem the idea of incentives in general? No. The problem is that the incentives exist in the form of a complex patchwork of tax credits and deductions. This has numerous downsides: it makes the tax code more complex (and costly) for everyone, both government and taxpayers (corporate ones in this case). It’s also arbitrary and subject to political wrangling. And over time, companies will find ways to exploit loopholes.

    On the other hand, simple, system-level incentives can be perfectly legitimate. Indeed, any tax system creates incentives of some sort, and unless you’re a total anarchist, some degree of taxes are necessary, so you end up creating incentives. We might as well put thought into them.

    Personally I like the idea of consumption-based taxes or use-based taxes rather than production-based (i.e. income tax or value added tax) taxes, as taxes discourage an activity, and if you discourage using up of resources you will encourage preservation of wealth, thus increasing total wealth, whereas if you discourage creation of wealth you end up with less total wealth.

    Alex Zorach

    February 24, 2011 at 12:49 pm

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