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Can Taxes Be Cut Below Zero?: Touted Tax Plans, Transfers, and Net Beneficiaries
If the federal government provides a refund check to someone with no income tax liability, is it a tax cut? It's in the news lately, with both Sen. McCain and Sen. Obama touting tax cut proposals. Both include "tax expenditures"—targeted refunds for meeting certain qualifications or doing certain activities—that could be described as more akin to a spending program than cutting tax burdens (although admittedly Sen. Obama does more of that). Many of us got them earlier this year in the form of the stimulus payments, sometimes deceptively called a rebate.
One op-ed gives an example of the concern:
The statistics speak for themselves. Only 62 percent of Americans pay federal income tax, meaning that 38 percent get a 100 percent refund of any taxes withheld. So Mr. Obama's 95 percent that will receive money from the government includes roughly 33 percent of Americans who pay no income tax. One-third of Americans pay no income taxes yet would receive a government check of perhaps $1,000 or more.
That is pure income redistribution.[...]
So on one hand, we're just substituting the IRS for HHS as the check signatory and renaming it a "tax cut." On the other hand, virtually all American workers pay payroll taxes (Social Security and Medicare), so there is some amount of tax liability to "cut" taxes from. Of course, the money for these checks is not actually taken from those two entitlement programs, but it's all fungible anyway.
If a majority or even a large part of the population are net beneficiaries of government spending—taking more than they give—it can present problems for fiscal discipline as the majority can just vote itself a free lunch. That's not just working-class families, either: the recipient of a Wall Street bailout or a wealthy businessman taking a bunch of targeted tax credits can be taking more than he gives just as much as those nonpayers.
So is any transfer from government to an individual a "tax cut," or must there be something more?
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The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.