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![handle is hein.taxfoundation/iretcgadv0090 and id is 1 raw text is: November 19, 1999 No. 93
THE EXTENDERS: HOW NOT TO
MAKE TAX AND BUDGET POLICY
The bill to provide for an extension of certain
expiring tax provisions is squeaking through the
Congress just before
adjournment. The last minute
nature of the exercise has, Extenders s
predictably, produced an Primarily froi
inferior product. hyiaot viini
Extenders
The major extender items
are:
- The R&E credit, extended 5
years, through 2004, but
credits accrued in 2000 and
2001 could not be claimed
until October 1 of the
following years, to save the
government money;
0 Preventing the AMT from
'iould
11Pr
11 CO C
restraint. They s
used as an excuse
taxes, fees, orfines
or consumers... [In
saddled with perma
mostly on busines
result in reduced ii
growth... or
consumiers.
be p
limiting individual non-refundable tax credits or the
child credit, extended 3 years, through 2001;
- The Work Opportunity Credit and the Welfare to
Work Credit, extended 2.5 years, through 2001; and
- Exemption from Subpart F restrictions for active
financing income of U.S. subsidiaries abroad,
extended 2 years, through 2001.
The bill also extends through December 31,
2001 the deduction for employer-provided
undergraduate education, tax-exempt bond financing
of qualified zone school buildings, deduction of
costs of remediation of qualified brownfield
contamination sites, a credit for electricity generated
from wind and chicken waste, and several other
provisions as well.
The best of these expiring provisions ought to
be made permanent.
R&E credit. R&E produces spill-over effects
for which the business conducting the research may
not be fully compensated by the market. Basic
research findings may not be patentable, and may
redound to the benefit of competitors and society at
large. There are also demonstration effects from
successful product development: others gain just
from knowing something is possible. Science
advances faster when there is a large pool of highly
trained researchers in an area,
able to move from task to task,
be funded and constantly sharing ideas.
jected federal Insofar as businesses are
or spending unable to capture all these
hould not be benefits of their actions, they
i oer may underinvest in R&E. The
ton raise s oth R&E credit can be thought of
as countering these
stead,] we are externalities to bring about a
nent tax hikes, more optimal level of research
ses, that will activity. Since the externalities
nzestment and are permanent, the current
.ssed on to credit should be permanent, at
least and until basic tax reform
is enacted that could provide
even better tax treatment of
such activities. A permanent
extension would make the credit more certain and
make it more effective at encouraging R&E.
Treatment of foreign investment income from
the active business of financial
institutions as
exempt from Subpart F restrictions. Foreign source
income of subsidiaries of American companies
operating abroad is generally tax deferred until
repatriated (at which time the U.S. parent pays U.S.
tax, net of foreign tax credits for taxes paid abroad).
However, Subpart F restrictions require that so-
called passive income from financial investments
Institute for
Research on the
Economics of
Taxation
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