Wednesday, June 22, 2011

Elimination of a Handout Program is not a Tax Increase

There is much debate within the conservative movement regarding the future of many government tax credits that are nothing more than handouts to specific individuals or industries.  The 45-cent per gallon ethanol tax credit is at the center of the debate in Congress.  Most conservatives view it as a gratuitous handout used to prop up a favored industry by the federal government.  Americans for Tax Reform views the elimination of this credit as tantamount to increasing taxes.  They assert that any chance in the tax codes that nets revenue for the government is considered a tax increase.

The problem with such a rationale is that there is no end-game for government programs that are ensconced in the tax code.  What if the government offers a tax credit for those who buy products of Democrat corporate cronies and then proceeds to repeal that credit?  Would it be deemed as a tax increase by ATR?  That question is already a reality due to the plethora of green tax credits.

Another dubious point about such a broad view of tax increases is its aversion to raising revenue.  As supply-siders, don't we all believe in the Laffer Curve - that certain tax deductions could actually spawn economic growth to the point that federal revenues go up?  Undoubtedly, we all desire to starve the federal behemoth, but should we oppose tax cuts on the counterintuitive assumption that such a move will increase federal revenues?

Investors Business Daily has a succinct article addressing this point in today's paper:

"But what about when those credits and deductions are actually spending programs masquerading as tax preferences? The Earned Income Credit, for example, reduces federal income tax liabilities for millions of lower-income Americans. But because the credit is refundable (which means recipients can receive benefits in excess of their income-tax liabilities) far more money is spent annually on "refund" checks to recipients than is forgone in income tax revenue.

Is trimming a federal spending program that happens to reside in the tax code a tax increase? [...]

Similarly, is it a tax increase when well-designed revisions to tax policy spur economic growth and, as a consequence of that growth, generate additional tax revenue? This isn't to say that all tax cuts pay for themselves. (Most don't.) But taxes change incentives and influence behavior.
Reducing marginal tax rates can improve the incentive to work, save and invest — and the positive impact on economic growth will result in either a smaller-than-expected revenue loss or, in select cases, an outright increase in overall tax revenue. The point is it cannot be said that an increase in tax revenue is proof of a tax increase."

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