Where Fun Comes to Die

According to their facebook statuses, most people I know are very eager to have the elections done with.  Without the elections, though, we might never have learned how easy it is to amend the California constitution or about the existence of refundable tax credits.

Shocking revelation for me: you can receive a bigger tax refund check than the total amount of money you paid in income tax.  With refundable tax credits, you can owe negative income taxes and actually get the government to pay you the difference.  According to this article:

For the most part, the government enacts tax credits to encourage certain behavior. For instance, the Saver’s Credit is designed to give low-income workers incentives to fund retirement accounts.

Making tax credits refundable allows lower-income workers to take advantage of them, said Robert Greenstein, executive director of the left-leaning Center on Budget and Policy Priorities. Since many lower-income workers pay little or no tax, a non-refundable credit such as the Saver’s Credit isn’t much use to them. Obama wants to make the Saver’s Credit refundable.

McCain calls refundable tax credits an expansion of welfare because,

Republicans oppose sending money without restrictions on its use to people who don’t pay tax, said Douglas Holtz-Eakin, McCain’s senior economic policy adviser. And the GOP doesn’t like paying for it by increasing taxes on wealthier Americans, which they say is another example of Obama’s ideological drive to redistribute wealth, he said.

If you believe a penny saved is a penny earned, then there seems to be no distinction between a tax credit of $200 to someone who doesn’t owe taxes and a tax credit of $200 to someone who does owe taxes.  Tax credits target and reward certain behavior, whereas welfare benefits target and reward need.  I think that is the better argument for the Obama camp to make, rather than the argument they do make:

Obama supporters . . . take issue with the Republican view that the refundable credits would go to people who pay no tax. Those who don’t pay income taxes still support their state and federal governments through payroll taxes for Social Security and Medicare, sales taxes, property taxes and gas taxes.

Can’t you make the everyone-pays-taxes argument for anyone who has ever bought groceries or gas?  The problem is literally everyone pays taxes, Including everyone on welfare.  It’s not necessarily true that people who pay sales tax are supporting the government vs. being supported by the government.  If that is the justification for Obama’s increase in the number and amount of refundable tax credits, I can see why it looks a lot like welfare to the McCain camp, particularly with quotes like this from the above-mentioned Robert Greenstein:

If you are a millionaire, you get the child care tax credit. But if you make $20,000, you are denied it because you don’t make enough. It ends up going to the least needy.

It’s one thing to argue that the person making $20,000 will probably derive greater utility from the tax credit than someone making $200,000, but “the least needy”?  I know the target audience for that sort of statement is probably not libertarians, but how can people not get a little nauseous from reading such blatant paternalism?

I am not even sure if the utility argument is legitimate.  Yes the government may be getting a bigger bang for its buck by giving a tax credit to people who don’t earn enough to pay income tax than to people who earn $200,000.  But the biggest bang for the government’s buck would be to give the credit to those in the lowest tax bracket.  If my income is just under the tax cut off, I have very little incentive to make a little more money because then my entire income gets taxed.  In a normal tax credit world, you could at least argue that there is some marginal benefit to people who begin to pay taxes because they can start to access the various tax credits.  Tax credits, unlike tax deductions, can offset additional income many times larger than the amount of the credit itself, adding even more benefit to the taxpayer.  For instance, each couple hundred dollars in tax credits could mean another thousand dollars or more in income a taxpayer could earn tax free.  The value of the tax credit then is not only the money given and the utility received, but also the added incentive for the worker to earn maybe 5-10% more of their income than they otherwise would.  In a refundable tax credit world, there would be no such incentive to earn enough to enter the lowest tax bracket. If we made all tax credits refundable, it would conflict with some of the desired purposes of the tax credits themselves, e.g. the “making work pay” credit.  It could also arguably over-incentivize tax credits such as the child/dependent tax credit.

Most shocking/sickening revelation of the entire article:

“Most people pay more in Social Security taxes than in income taxes,” said John Irons, research and policy director at the liberal Economic Policy Institute.

Luckily the wealthy still benefit from the social security cap, right wealthy? (wicked laugh, twist of capitalist mustache)