> More broadly: every tax cutout, no matter how well-intentioned, distorts the economy by paying smart people to spend more time figuring out how to hit the algorithm versus doing whatever they would otherwise do to earn money.
Worse, the smart people often figure out a way to go beyond whatever tax break was intended, then other smart people have to spend time figuring out how to tweak the tax code. The tax code then grows.
My favorite example. Once upon a time a large company (I think it was General Motors) was preparing to pay a dividend, which would count as ordinary income for the shareholders. One of their smart people got the bright idea of instead of a dividend, doing a stock split to slightly increase the number of shares (say, a 50 for 49 stock split), then having the company do a buyback to reduce the number of shares (say, buy back 1/50th of the shares). The split was not a taxable event, and the buyback could then be reported by the shareholders as capital gains. Ta-da! Ordinary income converted to capital gains.
So now there are something like three pages of regulations and tests to determine how to classify a stock buyback to stop that trick, but not to penalize buybacks that aren't for tax avoidance, and to anticipate possible loopholes in those rules or close loopholes that have been found in them.
Worse, the smart people often figure out a way to go beyond whatever tax break was intended, then other smart people have to spend time figuring out how to tweak the tax code. The tax code then grows.
My favorite example. Once upon a time a large company (I think it was General Motors) was preparing to pay a dividend, which would count as ordinary income for the shareholders. One of their smart people got the bright idea of instead of a dividend, doing a stock split to slightly increase the number of shares (say, a 50 for 49 stock split), then having the company do a buyback to reduce the number of shares (say, buy back 1/50th of the shares). The split was not a taxable event, and the buyback could then be reported by the shareholders as capital gains. Ta-da! Ordinary income converted to capital gains.
So now there are something like three pages of regulations and tests to determine how to classify a stock buyback to stop that trick, but not to penalize buybacks that aren't for tax avoidance, and to anticipate possible loopholes in those rules or close loopholes that have been found in them.