Low level chaos looms in the US tax code and everyone has one person to thank: Barack Obama.

The dog’s breakfast of fail that is the US tax code is complicated. It is make moreso by sweetheart deals to particular industries and games played with scoring tax breaks for CBO purposes. One of the easiest ways to evade CBO scoring a tax cut too expensive, other than hiring Jon Gruber to build you a model and salting CBO with his grad students to do the analysis, is to make tax credits “temporary.” Some 55 such tax credits expired last January 1 but everyone has moved ahead as though they were, like any other year, going to be reauthorized:

Included among the provisions that expired on January 1, 2014 are the following “big ticket” items:

·   The Research & Development Credit.

·   The New Markets Tax Credit.

·   15-year depreciation life for qualified leasehold improvements, restaurant buildings and retail improvements.

·   50% bonus depreciation.

·   The ability for taxpayers to immediately deduct up to $500,000 of asset acquisitions under Section 179 (without an extension, it plummets to $25,000).

·   A 100% exclusion available for the sale of qualified small business stock held longer than five years (see here for a detailed explanation).

·   Abbreviated 5-year recognition period for S corporation built-in-gains (see here for a detailed explanation).

For a while all was smooth sailing. Most of these tax breaks have widespread support and even those opposed to the breaks understand that there is a certain virtue to be had in a predictable tax code. In fact, there was even a breakthrough which looked to provide additional stability to the business planning:

On Tuesday, word spread throughout the tax community that at long last, a deal had been struck to extend all 55 expiring provisions. More notable, however, was the indication that while the majority of provisions would be extended for two years — retroactively for 2014 and through December 31, 2015– Congress had finally taken the initiative to make a few of the provisions, including the R&D Credit and the $500,000 Section 179 deduction, permanent, eliminating the need to repeat this song and dance, at least for those high-priority provisions, in 12 short months.

Then Barack Obama, in an act of force majeure announced he was rewriting immigration law to suit himself.

What, you’re probably asking yourself, could this possibly have to do with tax policy. Two of the extensions are for the Earned Income Tax Credit and the Child Tax Credit, two of the credits most widely abused… particularly by illegal immigrants.

As negotiations progressed, Republican leaders pressed their Democratic counterparts driving the legislation — namely, Senators Reid and Chuck Schumer (D-NY), the third ranking Senate Democrat–to abandon any plans to extend the EIC and CTCs.

Why would the GOP do that? Are they so heartless a party that they would overtly and openly line the pockets of billion dollar corporations while ignoring 97% of the population? Did the party view its victory in the recent midterm elections as a referendum on its policies, freeing it to act with impunity?

No. In fact, throughout the negotiations, the Republican party was content to further extend or even make permanent the temporary aspects of the EIC and the CTC. But then, on November 20th, the President usurped the power of a now-Republican controlled Congress by way of an executive action, in which he issued his plans for sweeping immigration reform. While details were limited, this was the take-away quote:

So we’re going to offer the following deal: If you’ve been in America for more than five years; if you have children who are American citizens or legal residents; if you register, pass a criminal background check, and you’re willing to pay your fair share of taxes – you’ll be able to apply to stay in this country temporarily, without fear of deportation. You can come out of the shadows and get right with the law.

Effectively, this meant that millions of illegal aliens no longer faced the threat of deportation, and could, as the President put it, “come out of the shadows.” But for the Republican tax writers, this meant the end to any hopes of extending the EIC and CTC.

You see, while the EIC and CTC are proven incentives that encourage and reward hard work, they also serve as lightning rods for abuse. And foremost among those taxpayers who have been accused of improperly benefitting from the two incentives are undocumented, illegal immigrants working within the U.S.

For instance, via Heritage’s Daily Signal:

More than a year after it was reported the IRS sent thousands of refunds to the tiny town of Parksley, Va., a woman has pleaded guilty to conspiracy and mail fraud.

Linda Avila admitted to obtaining more than $7.2 million in refunds by exploiting the federal government’s child tax credit program.

Avila filed more than 1,700 tax returns with stolen identifications used by illegal immigrants, mainly from Mexico.

The Virginian-Pilot reported that Avila, 50, operated a landscaping and cleaning business in Parksley.

Investigators found copies of refund checks in amounts from $4,000 to more than $7,000. The tax returns frequently cited foreign dependents, which increased the refund amounts.

Avila had the refunds mailed to various post office boxes on the Eastern Shore and in Delaware, according to court records. The workers cashed the checks and turned over most of the money to Avila, keeping a small fee for themselves.

Avila, who remains free pending sentencing in U.S. District Court on Feb. 17, could not be reached for comment.

Avila’s case is just the tip of the iceberg.

[mc_name name=’Sen. Charles Grassley (R-IA)’ chamber=’senate’ mcid=’G000386′ ], R-Iowa, said the IRS mailed $4.2 billion in child-credit checks to undocumented immigrants around the country. He accused the tax agency of misconstruing Congress’ intent that only U.S. citizens would be eligible for the child credit.

In a tale of intrigue fitting of a John Le Carre novel, Chuck Schumer and [mc_name name=’Sen. Harry Reid (D-NV)’ chamber=’senate’ mcid=’R000146′ ] acquiesced to the GOP position because they had tax credits very near and dear to their hearts that would be put in jeopardy if a deal was not reached in the current lame duck session of Congress.

The Obama found out. And to prove he is relevant he issued a veto threat. Right now a host of tax breaks affecting business and individuals are in limbo until a strangely united Congress and Obama reach an accommodation.

In a way, it makes more sense for the GOP to walk away from this mess rather than negotiate. Many people will be hit by the lapsing of the EITC and Child Tax Credit but those programs are rife with abuse and letting them lapse would provide an impetus to restructure them so that only authorized tax payers are paid. Many of the other tax credits should either be made permanent — CBO scoring be damned for they are either good policy or not — or, like the tax credit for wind generated electricity, they need to disappear. What the GOP must not do is, in the name of doing something, make it profitable to be an illegal alien.