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Missing the target

December 08, 2009

The tax code has achieved uprecedented levels of ugly in the last 15 years, and targeted tax credits are the reverse cosmetic surgery behind much of it. The conceit is that by careful rewarding certain behaviors with tax credits, Congress can make the world a better place. The reality is much messier. Dan Meyer explains how this works out with the "Hope Credit" for college costs:

The Treasury Inspector General for Tax Administration (TIGTA) asserted that the Hope credit for underclass (freshman and sophomore) college students probably allowed hundreds of millions of dollars in undeserved credits because of two significant defects in the administration of the credit. The first defect is that a given taxpayer could in practice claim the credit for the same student for more than the two permissible years. TIGTA estimates that nearly $600 million in excess credits were taken based on that defect. A second flaw is that many colleges failed to report the amount of tuition and other school-related expenses that qualified for the credit; allowing taxpayers to claim more than the permissible amount.

While TIGTA says the problem is with the administration of the credits, the real problem is in believing these things can ever be accurately targeted. They are complicated -- even tax pros have to keep going back to their books when they claim these -- and errors are inevitable. The IRS barely can process the returns with its creaky computers, let alone catch all of the mistakes. Colleges have proven hopeless in meeting their information reporting requirements, without which the IRS is helpless in enforcing the limits. As Robert D Flach says today in another context,

Many government programs and subsidies are administered through the Tax Code – and this should not be. The purpose of the Tax Code is to raise revenue. Period.

It's hard enough just for the IRS to compute taxable income and process returns. Now the IRS is supposed to manage health, education, research, energy policy, antipoverty efforts -- you name it. It's not surprising that it's a mess; it's a surprise they can function at all.

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