LEAVE HAPPY CAT OUT OF THE TAX CODE, PLEASE

I’m probably walking into a minefield with this one, but here goes.  Have you heard about the “Happy” Act?  The name itself is emblematic of the tortured logic that is commonplace in Washington D.C. these days.  The full name of the proposed legislation is the Humanity and Pets Partnered Through the Years Act (HAPP[tt]Y[a], get it?). It is HR 3501, introduced on July 31, 2009, by Representative Thaddeus McCotter, a fourth-term Republican congressman from Livonia, Michigan.

The Happy Act would allow taxpayers to deduct from their federal income taxes up to $3,500 per year in “qualified pet care expenses.”  I haven’t looked at it closely enough to say for sure, but I presume that it would be an itemized deduction, meaning that you would be able to take the deduction only if you itemize deductions, rather than take the standard deduction, on your federal tax return.

On one level it doesn’t seem controversial, right?  Every pet owner knows how expensive veterinary care has become.  Why shouldn’t a taxpayer be able to get some relief from the high cost of veterinary care through a tax deduction?

The problem with this approach to tax policy, as I have discussed in this space on previous occasions (see, for example, the April, 2009, Special Report) is that once the tax code becomes a vehicle to reward politically favored interests, or punish disfavored ones, there is no rational criterion for drawing the line between those interests that are worthy of tax rewards or punishment and those that are not.  This means that there is no hope of having a coherent, let alone a simple, tax system.

The complexity doesn’t end with just the deduction itself, of course.  What are “qualified” pet expenses, as opposed to ones that don’t qualify?  Are they going to be based on the type of expense, or the type of pet, or both?  There will be regulations to spell all this out, pages and pages of them.  It’s never as simple as it seems when the suggestion is first made, hey, why don’t we give tax relief to beleaguered pet owners?

I haven’t even mentioned what these types of tax breaks do to the revenue actually collected by the IRS.  The Tax Policy Center estimates that the revenue loss resulting from targeted tax subsidies like the Happy Act will soon exceed $1 trillion-a-year.

Perhaps equally bad is the distortion of economic incentives, and the resulting activity, caused by tax breaks like this, as people adjust their behavior depending on what the tax code favors.  You’d think that someone in Washington might want to have a tax system that makes the amount of revenue that will be collected at least somewhat predictable.  How can they possibly predict with any accuracy how much revenue will be lost because of taxpayers claiming the qualified pet care expense deduction?

That’s how we got to where we are today, with a tax system that is incomprehensible, unworkable, and openly treated by political decision makers as little more than a patronage system by which they can help their friends and hurt their enemies.

What does all this have to do with pet care expenses?  My family has a cat, formerly known as Happy Cat because he looks like a cat who was given that moniker in a widely known web posting (you can see it at https://icanhascheezburger.com/2007/01/11/i-can-has-cheezburger-3/; check out the main site at icanhascheezburger.com if you like funny photos of cats).  He was rescued from a shelter by a friend.  He has required a considerable amount of veterinary care since he was rescued.  Kumo (the new name we gave him when we adopted him- it means “cloud” in Japanese), or more accurately, my family, is certainly more deserving of a tax break for care provided to a cat rescued from a shelter than someone who bought a purebred pit bull, or maybe a cockatiel, right?  See what I mean when I say that when you start down this path there is no end to the lines that have to be drawn, each one based on someone’s subjective notions of what is or isn’t worthy?

Here’s where I know I’m going to get into trouble.  Why are pet owners more worthy of a tax break than, say, Prius owners, anyway?  Oh, wait, I forgot, Prius owners already got a tax break.  So, pick your favorite humanitarian, or environmental, or whatever, activity or cause.  Who could be against it (whatever “it” is), right?  If it’s a good thing, then it should be encouraged.  Tax breaks for everyone!

But isn’t the purpose of the tax code to raise revenue for necessary government services, and to do so as fairly and efficiently as possible?  Not anymore, judging by the behavior of our congresspersons.  No, the primary purpose of the tax code, judging by their actions, is political patronage.  Almost no one in Washington seems to care as much about whether the tax system raises enough revenue to pay for everything the government does (never mind about whether it is fair and efficient) as they do about whether favored groups get breaks, or disfavored groups have to pay more.

Given that climate, it shouldn’t be any surprise that the Happy Act not only has been proposed, but will probably be enacted.

“TAN TAX” IN, “BOTAX” OUT

As if on cue to prove my point about tax policy becoming nothing more than a way for politicians to reward favored interests and punish disfavored ones, the United States Senate, at the last minute in their efforts to approve a bill on health care, removed a proposed 5% tax on elective cosmetic procedures and replaced it with a 10% tax on “indoor tanning services.”

The change was helpfully suggested by the American Academy of Dermatology Association (who do, among other things, elective cosmetic procedures).  Of course, everyone knows tanning is bad.  How could anyone be opposed to taxing this societally useless activity, right?  Botox injections, on the other hand, are of great value and deserve to be “subsidized,” no?

According to the Wall Street Journal, Congressional forecasters project that this tax will produce $2.7 billion in revenue to the government over a ten-year period.  The tax on elective cosmetic procedures was projected to bring in $5.8 million over the same period.  I guess the Senate decided they didn’t really need that extra $3.1 billion.

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