What is a tax cut?

A lot of talk has been made recently about the economic “stimulus” plan that President Obama and the democrats have proposed. One of the things you’ll hear is that a large portion of the bill, about $275 Billion worth, is going to include tax cuts for 95% of Americans. If you have a good memory, which most Americans don’t, you’ll remember that President Oboma promised tax cuts to 95% of Americans on the campaign trail and that this policy helped him gain support across the country. What Senator McCain failed to articulate a few months ago and what the media is failing to indicate now is that a great portion of these so called “tax cuts” aren’t really tax cuts at all.

Republicans and Democrats have argued over tax cuts for decades. Republicans have historically called for increased tax cuts while Democrats have called for increased taxes. In the end the argument that the people usually hear in sound bytes always comes down to whether or not the rich should get tax breaks. But what exactly is a tax cut? Simply put, say you have a sales tax of 8% in your county and the legislature votes to decrease that rate to 7%. That is a tax cut meaning you will pay one less dollar to the government on every hundred you spend. More importantly though is income tax cuts. Say you make $40,000 and pay taxes at a rate of 10% (don’t we all wish), that means you’ll have approximately $4,000 taken out of every paycheck. This means if a tax cut is introduced bringing the rate down to 5% you only pay $2,000. The other way a tax cut could occur is by deductions. Say you’ve given $2,000 to a charity and that qualifies for a deduction, when you do your taxes you’ll wind up getting $2,000 of your money back. If you have more deductions than the taxes you paid then you will get back the amount you paid and nothing more. [yes I realize this is all an over simplification of a very complex process]

Now don’t get lost in all the numbers there is a point I’m really trying to make here. In the new stimulus plan, rather than reducing the rate of your taxes (aka a tax cut), or giving you extra deductions the plan actually offers tax credits. Remember our numbers from before, but this time imagine there’s a $1,000 credit for having a child. This means that at the end of your taxes when you’ve determined if you owe anything or the government owes you something, you add on the credit. So say you paid your $4,000 over the year, and you have two kids. That means at the end of the day you get $2,000 from the government. It sounds the same as the deduction example right? Wrong. What if you didn’t owe any taxes because you made very little money then you get the $2,000 without having paid anything at all, or what if you have 14 kids because you just popped eight out at once? Well then your credits start to add up and you’re getting money back that isn’t yours.

You see the difference between a tax cut and a tax credit is that when a tax cut happens the government gives you back more of the money you earned. When a tax credit happens the government gives you money that some other tax payer earned as long as you behave a certain way. It’s a sneaky underhanded way of increasing welfare in the name of tax cuts. I’m all for 95% of Americans getting tax cuts, the problem is that some 40% of  don’t have to pay any taxes. I was one of those 40% last year actually. When I filed my tax return I got all of the money I had paid back which is great but in no way did I deserve to get extra money above and beyond what I paid back. I wouldn’t have earned that money and I don’t deserve to get it. Make sure you watch both of the magician’s hands in Washington or you might just fall for a bit of trickery.

17 thoughts on “What is a tax cut?”

  1. @JB – Thanks for your comments. I agree that the Bush Administration was partially at fault for this mess for failing to fix Fanny and Freddie, but that being said I hope that you also would be willing to admit the role that Clinton and Carter had in pushing toward home ownership as a right. The government got its hands into the housing industry by forcing private banking to accept loans they wouldn’t otherwise have accepted, and then when everything blows up we act as if it was the greed of private banking that caused the issue. There is blame to go around to everyone.

    @abortion – We could spend hours and days debating abortion, but I have no desire to do that, however, Obama said about his daughters and I quote: “I am going to teach them first of all about values and morals. But if they make a mistake, I don’t want them punished with a baby.”

    To me that is categorically a “pro-abortion” stand. Pro-choice could be, as you said, a situation where you wouldn’t believe in having an abortion yourself but believed others could. The President, on the other hand, would be in favor of an abortion if one of his daughters got pregnant. That’s pro-abortion.

    HT’s last blog post.. Bold Faced Lies

  2. And Obama isn’t Pro-Abortion. He’s pro-choice. I doubt the man Obama would tell you that you should go get an abortion. I doubt many pro-choicer’s would, I certainly wouldn’t. I’m morally opposed. I do however, believe that it’s not the government’s business. Can they tax that fetus? No? Then how can they call it living? They tax the life out of everything else that draws breath and flips a voting level.

  3. @Zepuka – How else do you think the Great Depression came to a close?

    @Whiny Conservatives opposing the slightest redistribution of wealth – You realize that it was in fact the greed of the wealthy and the Bush administration’s enabling (with the Bankruptcy restructuring, and the ignoring of warnings from the former head of the agency watching over Freddie and Fanny) that put us in this mess. The über-wealthy should be paying much higher taxes because they profit off the toil of their underpaid minions, (even though they do,) they should be paying because they made this mess.

  4. I can’t remember the exact date, but sometime in the 1930’s I think… around the great depression, the tax rate on the highest bracket was 98%… Let’s hope that ‘punishment’ doesn’t go that high again… X_X

    ZePuKa’s last blog post.. Updates

  5. Think about it this way: would you ever go to your neighbor and tell him to give you $5000 because you need it? No. You would have more pride than that (not to mention he probably wouldn’t give it to you anyway). But when people take welfare and other such things, that is EXACTLY what they are doing. Everyone in America must have forgotten that all the money the government is “giving” us had to come from us to begin with. They take our money, waste almost all of it, then give us whatever is left over and make it seem like they are doing us a huge favor. And why is it that we always want to punish the rich for making more money than everyone else? They earned it; they have just as much right to their money as I do to mine.

  6. Wow you’ve both managed to make me like the home buyer’s tax credit even less. I wonder if first time home buyers have any clue that that’s what they’re signing on for when they do so…my guess is no.

    HT’s last blog post.. What is a tax cut?

  7. Gill is correct. I work for one of the ‘bad guy’ paid tax preparer companies, so I have seen this first time home-buyer credit work a few times. This year it is (up to) $7500 (or 10% of home price, which ever less). Count for any first time home buyer from july08 to jun09. In 2 years you start repaying the ‘credit’ (loan) in 15 once a year repayments. I haven’t heard if the 15k one mentioned works the same way or not.

    HT does a good job on showing how easily Americans can be duped. Not only is there a remarked difference between the 2 types of credits (nonrefundable and refundable) there’s alot of gray area and unspoken rules- like everyone hears how charity contributions are deductible- but only if you itemize, and so on. I wont bore people with the numbers and such. Even if the legislature comes through with ‘tax cuts’ we till have to read the fine line- I heard a politician harping on how he wanted to see some capital gains tax cuts to help America… and hated to agree with the democrat who said who in America actually had capital gains last year…

    p.s. keyboards don’t like to work after dumping half a soda in the keys, so excuse the typos, etc

  8. Allegedly, the new home buyer’s tax credit is a “loan” of sorts that will be paid off through increased taxes after a certain point or something…I can’t remember exactly how it works.
    Still, your last comment makes such a basic point; we probably wouldn’t be in the midst of such a bad “economic crisis” if everyone only bought what they could afford!

  9. Let’s not forget this is not just the Democrats doing this either. The Republicans in the Senate have pushed for and gotten added a $15,000 tax credit for new home buyers to the package. That’s just as bad if not worse than what the Democrats are doing. It’s all a disguise for pushing a particular agenda. The Republicans were quite complicit in the housing bubble issue and if the start doing things like this they won’t be helping it.

    If you can’t afford to buy a particular house, whether it’s your first time or not, you shouldn’t be buying that house. And this is coming from someone who would benefit greatly in the somewhat near future from a $15,000 tax credit of this type.

    HT’s last blog post.. What is a tax cut?

  10. It does seem to contribute to the “entitlement” philosophy too many people have toward government (TAXPAYER!!!) funding. I don’t know how anyone thinks that consistently providing ways for people to get money they haven’t earned (and don’t truly NEED)is going to turn out well for anyone in the long term. It’s amazing how easily proponents of these policies can spin the issues to camouflage(sp?) reality.

    BTW, it’s nice to read and post to a blog that I can actually access from my school computer during my lunch break. I guess there aren’t enough middle schoolers going to this site to warrant a block…haha

  11. @Dan – We only have to worry about our grandchildren paying for this if the US doesn’t lose its credit rating and default on all its loans.

    @ZePuKa – I just used that credit as an example, however, that very tax credit in this plan was described as: “Greater access to the $1,000-per-child tax credit for the working poor.” That means people who are poor and have more children are more likely to get this money. That increases the incentive to have children you can’t take care of, and also increases dependence on government to those families. The key is to create dependence not to push the pro-abortion views, those will get taken care of in different ways if the opportunity presents itself.

    HT’s last blog post.. What is a tax cut?

  12. Ah, thanks for explaining tax credits… I wonder if there really will be credits for having children… with Obama in office, and his pro-abortion views, it doesn’t seem plausible.

    ZePuKa’s last blog post.. Updates

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