The internal revenue code is a monstrous nightmare of special-interest loopholes and class-warfare penalties, but at least is generates some interesting stories. Here’s a report from Bloomgberg about a court deciding that the costs of switching from a man to a woman are tax deductible. Since I’m not a leftist, I’m not going to make the absurd argument that taxpayers are subsidizing sex-change operations. After all, the case revolved around how much of his/her own money the taxpayer got to keep. But I am an economist, so I’m going to say that tax loopholes tilt the playing field and encourage all sorts of inefficient outcomes. Indeed, this tax court ruling should be seen as a symbol of why tax preferences for health care should be eliminated as part of the shift to a simple, fair, and neutral flat tax:
Costs incurred in sex-change operations and procedures are tax-deductible, the U.S. Tax Court ruled. The Washington-based court decided yesterday that hormone therapies and sex reassignment surgeries are necessary to treat gender identity disorder, a disease, in the case of a Boston- area man who became a woman named Rhiannon O’Donnabhain. “The Court is persuaded that petitioner’s sex reassignment surgery was medically necessary,” Judge Joseph Gale wrote in a 69-page decision for the majority. The decision is the first to rule that sex-change operations qualify as medical care and overturns a 2005 Internal Revenue Service policy denying medical expense deductions in such operations on the grounds they are ‘cosmetic.’’ The case involves a $5,679 tax bill assessed by the IRS, which denied medical deductions claimed by O’Donnabhain after she underwent sex reassignment-surgery in 2000. O’Donnabhain, a civil engineer who joined the U.S. Coast Guard during the Vietnam War, was diagnosed with gender identity disorder in 1997. O’Donnabhain sued the IRS after it denied her deduction of $25,000 in out-of-pocket medical costs associated with the surgeries and other care such as hormone treatments and counseling, according to Boston-based Gay & Lesbian Advocates & Defenders, which represented her in court.