Lee A. Sheppard has published Administrative Repeal of Disallowance for Carrying Tax-Exempts, 106 Tax Notes 894 (2005), also available on the Tax Analysts web site as Doc 2005-3305, 2005 TNT 35-5. Here is part of the opening:

Grover Norquist is agnostic about tax reform. How’s that again? Isn’t Grover Norquist a right-wing antitax crusader who runs Americans for Tax Reform, a lobbying group? Don’t he and his group want to send the hated income tax straight to heck?

All that is true, but Norquist figures that what with Congress having passed four tax reduction bills during the Bush administration, we’re already most of the way toward taxing only labor income. A few further tax cut bills would make tax reform a wholly unnecessary formality. The income tax is already well on its way to oblivion. "Bush’s cuts have brought the United States tax code closer to a system under which income from savings and investments aren’t taxed at all and revenues would be raised exclusively from taxes on labor," The New York Times Magazine observed….

Norquist is certainly correct about the long-term effect of the Bush tax cuts, and he may be more correct than he knows. When the Bush administration’s failure to enforce the law is added into the mix, it is a wonder that the government is collecting any tax on income from capital. (And we want to meet that mythical little old lady with the share certificates in her mattress who is paying a double tax on corporate income.)

We’ve been regularly accusing the Bush administration of making a show of tax shelters while failing to enforce taxes on business. Most of the examples of that are too complicated for a general- interest newspaper. It’s tough to explain a deferred subscription agreement even to practitioners.

But this article is about an example of administrative negligence that even a supply-side economist could understand. The Bush Treasury has administratively repealed section 265, which disallows deduction of expenses to carry tax-exempt bonds, for nonfinancial corporations operating as groups. (That would be all large corporations.) The good news is that Congress has been advised that the underlying statute should be tightened.