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Ron Paul Pushes for More Subsidies for Housing

1 min readBy: Gerald Prante

Republican/libertarian congressman Ron Paul has put forth a proposal for a permanent extension of the recently-expired Homebuyer Tax Credit. Of course, Dr. (No) Paul would never support a government spending program called "Welfare for Homebuyers," but his proposed Homebuyer TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Credit is economically equivalent to such a program. They differ only in semantics. Let's take a look.

If I have an income tax bill of $3,000 and buy a home, under the Homebuyer Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , I would get a check from the government for $3,500 (6,500 less 3,000) and owe no federal income tax. My household's disposable income increased by $6,500 as a result of the credit.

If I have an income tax bill of $3,000 and buy a home, under the Welfare for Homebuyers program, I would get a check from the government for $6,500 and owe $3,000 in federal income tax. My household's disposable income increased by $6,500 as a result of the welfare.

What about marginal incentives? Since the credit is 100 percent refundable, there is no change in my marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. . If I earn $100 more and reside in the 25% tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. , I would be paying $25 of that additional income in income taxes under either of these policies.

In fact, since the credit phases out at high-income levels, the credit is economically damaging from a supply-side perspective.

In summary, credits that are fully refundable are economically equivalent in virtually every way to spending programs, regardless of the semantic labeling of the "portion to offset income tax before credits" or "refundable portion." It's all fungible.

At least nonrefundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). s, from a supply-side perspective, have a range where one's marginal tax rate equals zero, thereby making them technically economically different from refundable credits.

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