All government spending and tax incentive programs provide some benefits to economic activity that would take place without the incentive. I'm skeptical of attempts to increase the "bang for the buck" with so-called incremental tax incentives. I disagree with critics of general tax rate changes who prefer special incentives rather than general tax rate changes.
But giving tax money away for activity which has already taken place, with no positive future economic benefits, is a waste of badly needed tax dollars. The Bipartisan Budget Act of 2018, extended 29 tax provisions through the end of 2017, after they had already expired. The Joint Committee on Taxation estimates these retroactive windfalls cost $10 billion over the next 10 years. It would have been better to provide a one year extension for activity taking place in 2018 so at least some marginal incentive effect to change behavior would have been possible.
Many economists noted that the reduced tax rate on the deemed repatriation of previously deferred foreign source income upon moving toward a territorial tax regime provided a windfall to multinational corporations that had already benefitted from significant US tax deferral. Instead of being taxed at the prior 35% corporate tax rate, they were not even taxed at the new 21% corporate tax rate. The deferred income is taxed at 8% if held in illiquid assets and 15.5% if held in liquid assets, plus can be paid in installment payments over the next eight years. At a five percent discount rate, the installment payment option reduces the effective tax rate by an additional 17 percent. Although the partial recapture of previously untaxed foreign income is estimated to raise $339 billion over 10 years, the revenue gain could have been considerably more without adverse economic effects.
With the U.S. now entering a period of annual trillion dollar deficits yet still facing significant social needs, including funding opioid treatment and prevention and deteriorating public infrastructure, policymakers should make every effort not to waste tax dollars with retroactive windfalls. Unfortunately, the recent tax and budget bills are examples of distorted and wasteful priorities of our politicians providing windfalls to special interest groups.