Monday, March 08, 2010

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.

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At 7:06 AM, Blogger Ryan said...

I can't believe you spent this many paragraphs to type something so ridiculous…I’m even more upset that I wasted my time reading it. First, "tax cuts" are not divided among the population evenly...See the Bush tax cuts. The Obama tax credits go to those who are struggling in this recession. What you fail to understand is that $400/$800 that is returned to the struggling individual, is then recycled almost immediately back into the economy. That stimulates the economy...which is what was needed to break the back of the recession. In case this idea is too bizarre for you: take a family of 4 living off 30,000 a year. They are struggling to make ends meet…when they file their taxes they receive a tax credit of $800. They are then able to go to Wal-Mart and spend money on school supplies or food. This is sent to the corporations who then use the revenue (tax credit) to pay their CEO’s bonuses or in the case of your belief system…”hire more workers.”

At 7:17 AM, Blogger Ryan said...

Also, your reading of history is incorrect. Reagan did cut taxes his first year in office...these specifically caused such a shock to the system of our economy and lowered revenue that he had to raise taxes numerous times in the following 7 years. It's interesting to read you say that Reagan and Bush's tax cuts lifted us out of a recession...while ignoring the fiasco's that resulted in their terms. Not to mention the fact that the economy under Obama's policies initiatives has been chugging along remarkably well considering what he inherited.

A novel idea to force people to lose their unemployment benefits when we have 10% unemployment and businesses are just in the early stages of feeling comfortable to begin hiring...I guess we'll just let those who find it impossible to find a job live under a bridge outside your house...that should do wonders for the crime rate in your neighborhood. Frustrated, hopeless folks with no money looking for food.

As for "Incentivizing work"...if you think that someone will be less motivated to make 90k because they won't get a $400 tax credit, you're more loopy then I can tell...but your comment about Obama's ideology being one of hoping the recession continues already proved that.

At 3:15 PM, Blogger Warhero89 said...

The top two comments don't know what they are talking about. What they aren't understanding is that business's happen to benefit the most from tax cuts as you are no longer taking as much money away from them, increasing their confidence.

Both are tying into the bogus ideas that we should be in a welfare state where the government gives money to those struggling. It is not the governments place to do so. It is the governments place to make an environment that is beneficial to business's so they can hire and grow in our country, and it is more profitable to do their business here.

Any idiot can see our economy is still tanking, and all of those economists are lying through their teeth, i have family and friends getting laid off, and tax credits isn't the way to help our economy. Stop with this tax the rich bullshit, as they are the ones that invest and create jobs. Wait till november, as obama loses all his friends in the election. Liberal economic ideals are unrealistic and harmful to the country as a whole.

At 11:22 PM, Blogger Justin said...

Warhero8, you have one thing wrong. The wealthy are not the ones out there making jobs, no matter how much the house republicans like to say this. Small business owners are no where near the $200k mark, the national average is around $35k. Ending the Bush tax cuts for the wealthy would literally have zero effect on small business growth. It doesn't matter now, as it appears Obama has made a deal with the GOP, which is a terrible thing. Extending Bush tax cuts and extending unemployment benefits? Are you kidding? The GOP is just as guilty as Obama; calling themselves fiscally conservative is a laugh.


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