The tax code of the Martini lunch
Latest congressional bills on Covid relief and omnibus spending are a mix of special favors for teacher unions, the alcohol industry, wind power, racehorses and more . There’s even a Broadway bailout; say hi, Chuck Schumer. But for a sign of the political times, and how far Congress has strayed from basic economic logic, you can’t beat the return of the full business meal deduction.
President Trump has been pushing this for months, and Treasury Secretary Steven Mnuchin has made it a priority in the negotiations. Perhaps Mr. Trump fondly remembers the days when real estate and other executives could write off lunch or dinner at the 21 Club. Go ahead and order this Clos de Tart 2005. You can write it off. In the 1970s, this deduction became known as the “three martinis” deduction when Jimmy Carter campaigned against it. The full deduction eventually disappeared during the Reagan tax reform in the 1980s.
Now, the deduction will revert “for food or beverages provided by a restaurant” for the next two years until the end of 2022. The claim is that this will help struggling restaurants get back on their feet after the pandemic ends. by getting businesses out of the office for lunch. The estimated cost is $ 6 billion in lost tax revenue, which is a bargaining chip for Congress this year.
It is bad tax policy now or at any time. Restaurants have suffered during the pandemic, especially in states like New York with tight closures. But they won’t be revived with a lunch tax deduction. They will resume as the pandemic subsides and the public feels safe enough to return. No businessman we know makes a decision about lunch for tax reasons, and businesses don’t need another tax code exemption.
This is no relief from Covid. It is a political favor for a specific industry. But why restaurants, and not hardware stores or florists? They also suffered during the pandemic. Will a night to see the Miami Heat qualify for the deduction if you take your customers to a game and eat at the stadium’s sushi bar? Why not other forms of entertainment? The injustice is obvious, and it is what happens when politicians use the tax code as a vote-buying exercise.
Deduction is also bad policy. Democrats are already attacking it even as they gave the Republicans the deduction in exchange for progressive tax priorities. Democrats won more tax credits for their special interests and now they can beat the GOP for favoring executives who entertain their customers in fancy steaks. Republicans fall into this trap every time.
The bigger problem is how this tax loophole and others erode the guiding principles of tax reform: low rates with few loopholes or special credits. The 21% corporate tax rate in the 2017 tax reform was partly justified by the removal of specific tax provisions.
Lowering the tax rate helps all businesses by reducing double taxation of capital in the form of taxes on corporate profits and dividends. It has produced a more efficient allocation of capital and faster growth and wage gains. But the more the tax code becomes a piece of Swiss cheese, the easier it is for the political left to advocate for higher tax rates. The economy and workers are suffering.
Lawyers say the meal deduction is only valid for two years and will expire once restaurants are full of customers. Sure. The Wind Power Tax Credit was introduced in 1992 to help a “nascent industry”. It will be extended further this year, although the industry is middle-aged and making money.
Once a tax favor is granted, a lobbying industry forms around it, specific politicians become its champions, and killing it usually becomes too politically difficult. See the annual “tax extender” legislation that will be re-enacted this week.
The 2017 GOP tax reform was not perfect, but it reduced many distortions in the corporate tax code and made American businesses more competitive. You would think the Republicans would want to protect him. Instead, they return to the days of special tax code favors. You could call it the fiscal swamp.
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Published in the print edition of December 22, 2020.