Ron Paul Pushes for More Subsidies for Housing

June 6, 2010

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 Tax 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 Credit, 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 rate. If I earn $100 more and reside in the 25% tax bracket, 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 credits, 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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