The Difference Between Tax Cuts and Tax Credits

There is a pretty huge difference between tax cuts and tax credits. They are not interchangeable terms. For example the 900+ billion dollar stimulus plan did not contain any tax cuts in it. Obama and the media over and over talk about "tax cuts" in the stimulus plan, when there were none (they know the difference BTW). Repeating the lie over and over again does not make it true. So what is the difference? Tax cuts apply to everyone equally, and the tax is never collected. They simply starve the government of some revenue. Tax credits are more like legislating (spending) through the tax code. You pay your normal tax like everyone else, but then you get a credit back from the Treasury for fitting into some special class that the government wants to spend money to incentivize. For example if you offered a 10k tax credit for installing solar panels on your roof, you pay your normal taxes like everyone else, but then you get paid back out of the treasury pool the 10k. The government has just redistributed 10k from everyone else to you, because you did something they wanted you to do. Lets say this program costs 1 billion per year, you could also do a tax cut to the lowest marginal rate that would cost the same amount instead. As a result every tax payer would be able to keep their money instead of paying for a handful of solar panel installations. If everyone got to keep there money instead, they would spend it more efficiently and for things that they actually want and need, instead of what the government wants.

Recessions have ended before with tax cuts. They have never been ended before with tax credits. Of the three recent large recessions, two were ended via across the board tax cuts, and one was ended via fiscal policy alone before tax cuts were required. The Carter/Reagan recession was ended via tax cuts. This is not disputed by anyone. The 2001 Tech-bubble/9-11 recession was ended via tax cuts. You may not like the Bush tax cuts, but they did end the recession. If anything they worked too well. The Fed needed to slow things down after the economy was on fire shortly after the Bush tax cuts, but never did and hence the housing bubble. The across the board nature of both the Reagan and Bush tax cuts are designed to incentivize anyone who works for a living and pays taxes. The more you make the more your incentive for these types of tax cuts. These types of cuts work, because they incentivize hard work, and the money goes directly and immediately (through lower payroll deduction) to the workers who can spend it in the most efficient way for their individual needs.

Now lets contrast that with some of the main tax credit in the stimulus plan. I think it is called the make work pay tax credit or something like that. It is a tax credit of up to $400 for individuals and $800 for couples. The credit phases out at 75k/150k and is completely gone at 90k/190k. You can get the credit even if you did not pay any taxes as you can be eligible from your social security/medicare withholdings. So if you are not paying any taxes this is obviously not a tax cut in anyway, and simply a welfare plan. Besides that point, the government is incentivize you to not make more than 75k, and there is no incentive at all to make more than 90k. The amount of the credit is also way too small to have any meaningful impact on the economy. If the entire stimulus plan amount would have gone to an across the board tax cut the recession would be over now. So there is no incentive to work extra hard and be a top earner in the United States. If you make 95k a year, there is some incentive to work less hard, or less hours and fall below the credit cut-off amount.

Next up is the continued extension of Unemployment Benefits. This is not a tax credit or tax cut, but pure welfare. I really do not have a problem with an extension beyond the normal 26 weeks in very difficult times like now, but it has to be a one-time extension only. After you are 9 months unemployed you need to find a way to fend for yourself. I was on unemployment once many, many years ago, and I never bothered to look for a job. When they extended the benefits, again I did not look. When my benefits ran out, I went out and got a job. Extending benefits does not help the situation, because it incentivizes people to not get a job. People need to be doing something productive, anything productive, to help society. Unemployment insurance for 9 months is plenty. After 6 months start figuring out how you will survive without the governments help. You would be surprised what can and will happen when individuals are pushed to the edge. New home businesses spring up to fill a niche. A down economy can be a great time to start a business because rents and salaries are down.

The fact the Obama is refusing to do what historically works to end deep recessions, and that is specifically across the board tax cuts, is keeping the economy from recovering. I guess you can start to argue that Obama is ideologically opposed to an end to the recession. This is what is leading us towards depression.