Income Re-Distribution Features of the 2009 Stimulus Plan
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:
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?