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You're not writing me another big check? You tax hiker!

April 02, 2011

Some folks are adamant that reducing a tax credit is always a "tax increase," rather than a spending cut. Grover Norquist is perhaps the most notable champion of this view, but not the only one.

Then how about this "tax cut":

Even their tax preparer, the owner of H&R Block in North Carolina, couldn't believe her eyes.

But a couple making $39,000 annually who have adopted five children in recent years qualifies for a $54,000 tax refund. That's because an adoption tax credit of $13,170 per child became refundable this year. Hence, David and Thelma Ward will be paid the amount left over after the credit is applied to their tax bill, reports CNN Money.

Another CPA informs me that he had a couple who got a $26,000 adoption credit refund for 2010 with taxable income of zero.

It's crazy to say that the family that doesn't get a $26,000 check next year with no taxable income is getting a $26,000 tax increase.

While the refundable adoption credit is a dramatic example of the absurdity of calling a subsidy a "tax reduction" just because it comes through your 1040, it's not the only one. The earned income credit is a long-standing example of a welfare program run through the tax system. Refundable credits at the corporate level, like Iowa's research credit, are subsidies in the same way -- when you pay no tax and get a state check, it's a subsidy as sure as if the legislature voted you an appropriation.

Very similar are "transferable" credits, like most film credits. Because film companies are set up to disappear after the production, they rarely have tax to pay of their own. By being allowed to sell their credits to parties that do owe tax, they can turn the credits to cash. They sell them at a discount to make the deal worthwhile to the buyer. The economics are that the state allows the film company to factor state tax receivables at a discount. It's spending state assets just the same as writing a check, except with a loss for the discount.

It's unfortunate how many people who sincerely want to shrink out-of-control government spending are blind to spending run through tax returns. Whether the government check is authorized by an appropriation or a tax code section, it still is money coming out of the pockets of the rest of us.

UPDATE, 4/4: I forgot to thank Taxdood for the Twitter hat-tip. Thanks!

Related:

Hiding government spending by running it through tax returns

Taking the credit isn't Sarah Palin's problem; signing it is.

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Comments

Refundable credits should be eliminated - right after the elimination of payroll taxes, self-employment taxes, early withdrawal penalties, gift taxes, and excise taxes.

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