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A Tax Credit for Every Problem

By: Gerald Prante

Janet Novack has a terrific article in Forbes Magazine on how 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. s have become the new way for politicians in both parties to spend, spend, spend…albeit in a way that is designed to look like a 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. cut. From Forbes Magazine:

In these divisive days, politicians of all stripes do seem to agree on one thing–tax breaks are the best (or at least, most expedient) way to accomplish nearly everything, short of fighting a war. (And there are special tax breaks for the men and women fighting too.)

The uninsured? President Bush wants to tackle the problem with a $15,000 per family health insurance deduction. The universal insurance proposal Sen. Hillary Clinton (D-N.Y.) offered last week included a new refundable 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. to help moderate income folks pay for health insurance and a new tax credit to help businesses with 25 or fewer employers provide insurance. Sure, there’s a big difference here. Bush’s deduction would only help those who actually owe taxes, and is worth the most to higher-income folks. Clinton’s credit is tilted towards middle and working class people and would be paid as a refund to those too poor to owe taxes. But both plans use the tax system to achieve their aims.

Clinton wasn’t the only Presidential candidate proposing tax breaks last week. Rival Sen. Barack Obama (D-Ill) proposed a new tax credit for workers, a new mortgage interest credit for those who don’t itemize and a special tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the IRS, preventing them from having to pay income tax. for up to $50,000 in income just for senior citizens, who already get a larger standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. than other folks.

The article goes on to mention how this trend has grown over the past thirty years, and the article also gives numerous other ridiculous examples of the tax code being used as a spending tool. It also includes this quote from the Urban Institute’s Len Burman, who used to work on tax policy under the Clinton administration:

“Republicans buy into it because they like tax cuts, and Democrats buy into it because they want new programs. But it has the same effect as direct spending, and it’s more wasteful.”

A point worth noting is that had the same questions been asked to any other public finance economist, you’d likely get the same answer, regardless of whether he/she worked under Clinton, Reagan, or Bush. There is broad agreement among those who study tax policy that the primary purpose of the tax system should be to raise revenue, not as a way to spend money without looking like you are spending money.

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