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% ofÂ 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.