Income Re-Distribution Features of the 2009 Stimulus Plan

January 28, 2009 by  
Filed under Taxes

The AMERICAN RECOVERY AND REINVESTMENT TAX ACT OF 2009 (a/k/a Obama stimulus plan) includes some new features by which income earned by some taxpayers will be re-distributed in the form of tax credits.  The income being re-distributed will go to other taxpayers and, in many cases, to individuals who are not taxpayers at all but merely tax return filers.

Here is a list of some of these credits, as identified in reports prepared by the Congressional Joint Committee on Taxation:

1.  A brand new $500 annual tax credit per tax filer, for 2009 and 2010 This is a refundable tax credit which means that the money will be sent even to those who pay no taxes at all.  Also, non-citizen taxpayers are eligible.  Taxpayers with adjusted gross incomes greater than $75,000 are not eligible for the credit, meaning that it is your income that will be re-distributed.  This is estimated to cost $24 billion in what is left of FY2009 and $81 billion in FY2010.

2.  The earned income credit is being increased to a maximum of $5656 for taxpayers having three children.  If you make more than $40,130, your income is being used to pay this increase in the credit.

3. The refundable portion of the child tax credit is increased.  Sorry, if your AGI is greater than $75,000, your income will be used to make these increased payments to tax filers.

4.  The Hope education tax credit is being increased from $1800 to $2500 per student.  If you make more than $90,000, your income will be used to pay for this increased credit.

5.  Repayment of the first time homebuyer credit of up to $7500 (this was put in place last summer) is being waived for home purchases made between 12/31/2008 and 9/1/2009.  This means that those of you with an AGI greater than $75,000 will be subsidizing first home purchases by tax filers with lower incomes. 

There are even more tax credits for business.  I am concerned about some of them but those are way too complicated and boring to discuss here. 

Some of you may be wondering “what’s the big deal, tax credits have been around for a long time.”  Agreed.  But I am uncomfortable with the way tax credits are now being used.  First, remember that these are “credits” not “deductions.”  The credit comes directly off of the tax owed, even if the tax filer does not itemize deductions.  If no tax is owed, a refundable credit results in a payment being made from the government to the tax filer, using taxes extracted from income earned by actual taxpayers.

Second,  it used to be that income tax credits rewarded or encouraged certain behaviors.  There are many examples.  One that I used some years ago was an energy tax credit for the purchase of a solar water heater.  In these traditional uses of tax credits, you received them for engaging in the desired behavior without regard to your income.

Third, it was rare to have a refundable tax credit.  You could use a tax credit to reduce your tax obligation but once you did that, the government did not send you a check for any unapplied credit balance.

Now the trend is to use tax credits to flat out re-distribute income from one group to another group.  This is done by establishing credits that are: (a) primarily income based; and (2) are refundable (payable to those who owe no taxes anyway). 

In four of the credits described above, eligibility for the credit is essentially a function of your income and filing status and is not based on rewarding or encouraging some behavior.   For all of the credits described above, if you make too much money, you don’t receive any credit.  Instead, you are the funder of the credit.  The brand new, fully-refundable $500 tax credit is the most blatant example yet of a tax credit used to re-distribute income.

You can probably tell that Mr. ToughMoneyLove is unhappy about the trend toward using tax credits to re-distribute income.  I am even more unhappy that Congress is using the current economic crisis as an excuse to accelerate the trend.  This may not bother other people.  I’m not trying to start an argument about it.  I just believe that every tax payer needs to be aware of what is happening to them as a result of these so-called “stimulus” plans.

If the government wants some of my income to be turned over to someone else who needs it more and is deserving, I would prefer to hand that other person a check directly.  I don’t want to embarrass anyone yet I could imagine a short conversation at the time of the exchange in which I would get to say something like this: ”The government has directed me to give this money to you.  I just want you to know that I worked hard for this money.  So please use it wisely and carefully.”  This would be a lot more satisfying to me and real for that other person than having the money pass through the IRS and its maze of hard to understand tax credits.

What are your thoughts on the use of income-based, refundable tax credits?


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Comments

13 Responses to “Income Re-Distribution Features of the 2009 Stimulus Plan”
  1. Melissa says:

    My thought is this. I’ve been trying to eliminate my personal debt. And now, I’m being put into debt (against my will, by the way) punishable by prison time if I do not comply, to fund other, less productive, people’s lifestyles.
    That makes me a SLAVE. And because this debt the government is forcing us into can’t be paid in MY lifetime, it enslaves my children, future grandchildren, etc. It burns me to listen to the kool-aid drinkers pontificating on the need for spending… because they are talking about forcing ME against my will to produce money to fund THEIR religion (whether that’s redistributive socialism, climate change dogma, etc).
    I seriously do not understand why we aren’t taking to capitol hill with pitchforks and torches… errr.. well I guess now it would be plastic sporks and blackberrys.

  2. WB says:

    I might be mistaken, but I believe your view on “taxpayer” is rather skewed. If you file a tax return, the assumption is that you’ve earned a living wage. Your wages are taxed before you collect the net, and therefore anyone who is paid legally is therefore a tax payer.

  3. Melissa: All I can say is call your Congressperson and complain, then vote with your convictions.

    WB: In my mind, there is difference between a worker and a tax payer. At least 40% of all wage earners pay no income taxes. Some may have taxes withheld but they are all refunded and may even receive an extra payment from a refundable tax credit. Some workers actually receive the Earned Income Credit in advance.

  4. Andrea says:

    Where to start …

    Republicans like to reduce taxes, and that’s really what this is, so what’s the problem? More money in people’s pockets means they’ll spend and stimulate the economy, right?

    Tax credits for desired behaviors – like getting an education and being part of an ownership society and?

    The homebuyer credit is a loan – http://www.irs.ustreas.gov/newsroom/article/0,,id=186831,00.html.

    OK, I understand your frustration, but what’s the alternative? There has already been a redistribution for years, it just happened to favor the higher income and wealth groups. Perhaps the guys at Merrill who got their bonuses before the BoA buyout or the executives who thought it’d still be cool with those of us getting caught by AGI limits if they went ahead and bought their $50 million jet could kick in a little more. What do you think? Is THAT income redistribution bad too? I mean, I understand that if you tax the super rich, you take away their incentive to be ambitious and make money and all, but it sure seems to me like the balance has tipped way too far and they’re in need of a little Robin Hood action.

  5. Andrea: I don’t call this a real tax reduction because it is temporary and doesn’t change the marginal rate. It is effectively the same as last year’s cash stimulus payment. Congress is doing it this year as a tax credit so that they can claim that they lowered taxes in 2009 and 2010. In 2010 the Bush tax cuts expire as will this credit.

    The home buyer credit was indeed intended to be a loan but the stimulus bill waives repayment of the credit for home purchases made after 12/31/2008. That makes it a gift to those buyers, not a loan. The article you linked to pre-dates the proposed change.

    I don’t like what the corporate types any more than you do. That doesn’t make me like all of these income-based tax credits any better.

  6. Nancy says:

    The problem with this tax policy is that in large urban areas that have a high cost of living (places like NYC, Los Angeles, San Francisco, etc), making $100,000 a year in total household is not very well to do at all. So basically these tax credits will hurt the middle class. No wonder we are leaving the state in droves…

  7. Adam says:

    I’m in the upper 25% income bracket.

    I have no problem paying my share of taxes. I would prefer that there weren’t refundable tax credits, but even with higher taxes, I make more than the people who receive these credits. I am not struggling to survive.

    I would prefer that the government used taxes to provide services of which I can partake, rather than a redistributive plan. However, I have no problem if my taxes go to support these services not only for myself, but for those less fortunate.

    I have never understood the argument that high taxes are an impediment to people wanting to earn more money. If I earn an extra $100K in a year, and the government takes 50%, I still have $50,000 more than I would have otherwise.

  8. kitty says:

    I wouldn’t have a problem with it had I believed for a second it’ll help the economy. But I just don’t see how any of the provisions do anything at all for the economy. The economy is just an excuse to spend money.

    It’s not people who are earning under 75K that sign my paycheck or anybody’s paycheck for that matter. So all these tax credits aren’t going to lead to increased employment. Some of these checks may go towards paying debts – ok, this is nice, but they are talking about stimulating the economy now. Others may go toward savings – again, too small an amount to increase investment in the economy. Even if a small part of it goes toward spending it’ll at best provide a very temporary increase, much like the previous stimulus was. Really, shouldn’t they have learned from last summer that just giving out $600 checks doesn’t do a thing for the economy?

    I read the republican plan on cnbc. I am not a republican – I voted against Bush twice, but I think a lot of provisions in the republican plan do help small businesses. Their plan also costs half of this one. So why with all the talk about by-partisanship, nobody in the congress even considered another plan?

  9. MasterPo says:

    LOL!

    All during the campaign when the Messiah said he was ‘only’ going to tax “the rich” of $250,000+ incomes no one cared. People said “I don’t make nearly that much so why does it bother me?”

    Today, “the rich” is a mere $75,000.

    I just love it!!! LOL!!!!! :-) ))))

  10. Andrea says:

    He’s not adding extra taxes to those who make $75,000, MP. Nice try at a spin though. Keep playing.

  11. Dusty says:

    What I don’t understand is why the tax credit gets phased out at $75,000. Why is this the line of demarcation? I distinctly remember Obama saying he would only tax the rich (defined by him – not me – as $250,000 per year). While he may not be “adding” taxes to those who make $75,000, why should they be excluded?

  12. MasterPo says:

    Andrea – Did he or did he not *promise* tax cuts for 95% of Americans? Did he or did he not say that “middle class” was under $250,000?

    Not even 3 weeks in office and already breaking major campaign promises. That’s got to be a record.

  13. CJ says:

    I don’t like tax credits and stimulus checks but having been employed and hungry before, I have a lot of respect for the fact that the people who get them aren’t usually spending them on televisions.

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