Sacred-cow subsidies we should eliminate (but won't)

Ann Crittenden

November 19, 1992|By Ann Crittenden

NOW that the election is over, all we have to do is get th economy moving again, tackle the deficit and add a few much needed domestic programs.

All this will take money. But instead of raising taxes, we could consider eliminating a few unproductive tax subsidies that favor corporate debt, foreign investors and long lunches.

Here are some suggestions:

* The debtors' subsidy.

Right now, a company can deduct all interest payments on debt, even debt incurred buying up its own shares.

This means that in effect the Treasury subsidized much of the damaging casino economy of the 1980s. The deduction was originally limited to investment in plant and equipment.

If the interest on debt to purchase more than $5 million in stock was no longer deductible, and if companies were no longer able to write-off "goodwill" and similar intangible assets of acquired companies, we would gain $9 billion over five years.

* The Puerto Rican subsidy.

Drug companies are the principal beneficiaries of the possessions tax credit. The idea was to create jobs in Puerto Rico by giving companies tax credits to set up manufacturing operations there.

According to the Congressional Budget Office, repeal of this credit would produce $15 billion in revenue over five years.

Do we really need to shelter an industry that charges Americans more for their drugs than consumers are charged anywhere else the industrialized world?

* The Jacuzzi subsidy.

The mortgage interest deduction allows the write-off of interest on mortgages of up to $1 million.

Only 19.2 percent of this tax break goes to home owners with incomes below $40,000 (79 percent of taxpayers).

If the deduction were capped at 15 percent for home owners with incomes of more than $150,000 (roughly cutting its value in half), the Treasury would save $15 billion a year.

* The advertising subsidy.

Companies can write off their annual advertising costs every year. Why not treat some of those expenses as a gradual deduction, since they can contribute to brand recognition that lasts for decades?

If 20 percent of the spending for advertising were deducted over four years, the Treasury would raise roughly $18 billion in the first four years, with declining gains after that.

* The Perrier subsidy.

Remember the two-martini lunch? Now it's bottled water, but expense-account lunches are still 80 percent deductible.

If the deduction were reduced to 50 percent, federal revenues would rise by $18 billion over five years and we would discover that the wheels of commerce didn't need that kind of grease.

* The foreigners' subsidy.

Interest income earned by foreigners on investments in the United States is tax exempt, making America one of the world's premier tax havens.

If a 5 percent tax were imposed on interest earned by foreigners on their U.S. securities, we would gain $11 billion over five years even if the tax were waived for those who reported the income to their own governments.

* The speculator subsidy.

This isn't a subsidy, but it could cost us a fortune if interest rates go up again.

Commercial banks enjoy federal deposit insurance on money they invest in Treasury securities, which pay higher interest rates than banks pay depositors.

But why should we insure deposits that are being used for interest rate speculation? Let's limit the percentage of assets a bank can use to play arbitrage games with insured deposits.

Getting rid of these kinks in the tax code wouldn't hurt the economy. On the contrary, it would allow the government to invest its tax dollars more productively.

Of course, anyone who knows anything about Washington knows that the chances of eliminating subsidies for the folks who write the tax laws are roughly equal to the chances of finding an open suitcase of $100 bills on 34th Street.

In other words, it would be a miracle.

Ann Crittenden is author of the forthcoming "Killing the Sacred Cows: Bold Ideas for a New Economy."

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