I Like This Idea

Unqualified Offerings calls it The equivalence principle:

Remember how the Tea Party refused to discuss removal of tax code loopholes? What if every targeted deduction or credit were replaced by a check, i.e. instead of deducting that dollar amount from your taxes you paid the full amount and then received a check for the amount of the former tax credit or deduction? Fiscally there would be no difference (aside from a possible difference in administrative costs, although processing and checking those deduction and credits must also involve a certain administrative cost at the IRS). However, eliminating those checks would no longer be a tax increase, it would be a spending cut. Would the Tea Party still defend these things

Of course step one would be derided as new spending, so it won’t work, but it’s a nice idea.

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2 Responses to I Like This Idea

  1. The idea is anything but nice.

    First, taxpayers would be subjected to the additional expense of the opportunity cost of the uses to which the money could have been put to while awaiting refund from the government. In essence, the taxpayer is making an interest free loan. (As an aside, it simply amazes me how “happy” people are when they receive a tax refund at the end of the year. They should be irritated with themselves for failing to properly plan, because they gave the government an interest free loan, and the interest was actually at all times rightfully due the taxpayer.) Forcing taxpayers to make interest free loans is a tax.

    Second, in the case of a credit, the author suggests a taxpayer should first pay the tax and later receive a refund. The problem is that the taxpayer may not have the cash to actually pay both for the action/item covered by a credit, and the tax due at the end of the year where the “idea” is we first pretend the credit doesn’t exist, and then send a check to the taxpayer later. The result will be that in some instances, the tax payer will not engage in the behavior that the credit was designed to encourage.

    Suppose for example in its infinite wisdom Congress decides to give a tax credit for purchasing US manufactured automobiles. In order to take advantage, you need the money to buy the car. Under the idea’s scheme, you would need not just the money to buy the car, but also (at least until you wait for the ultimate refund under the “idea”) the money to pay the tax as if there were never a credit. So in some instances, because of the silly idea of changing the way a credit currently works, some people would not engage in the behavior Congress wanted to encourage because the mechanics of the credit make it unaffordable. Now think bigger, a tax credit to build a factory that will employ thousands of people. At the corporate level, where credits may exist for certain kinds of factory building and other investments, jobs and livelihoods would be at stake.

    Whether a particular tax credit is good policy or not is an entirely separate question from how the mechanics of a tax credit should work.

  2. Just me says:

    Marksman’s comments are right on target (I regret agreeing with Marksman much more than I regret the pun).

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