Economics

Someone once said that the only two constants in life are death and taxes, but taxes, in a sense, are far worse than death.  Death only comes once and when it does, it's final.  In the US, taxes keep attacking your wealth long after your children and grandchildren have inherited it.

I have friends who have lots of kids.  Some of these families are made up of 8-12 people and counting.  Since the tax man gives a credit for each kid, these families have very little tax burden.  This is said to be a good thing, but my friends can't explain to me why it is a good thing.  Children are a net loss on society because they contribute nothing.  So those families with few (or no) children are paying for children that are not their own.  Even worse, these large families are getting cash back from the government at the end of the year in the form of tax credits from smaller families who are already paying more than their fair share.  It has been suggested that child credits are good because the government is encouraging procreation, but why is that the government's job?  In short - it isn't.

In effect, tax credits are nothing more than social welfare.  The only difference between tax credits and traditional welfare payments is a) it is assumed that anyone receiving tax credits has a job and therefore contributes something to the economy and b) tax credits are given to you months (or even years) after they're due.

They give the wrong people control

The Hybrid Car tax credit was recently introduced.  Imagine in ten years, the number of similar credits that liberals will have put out for their silly causes.  Low carbon footprint credit, neutral carbon footprint credit, buying/trading carbon footprint credits, extra credits for donations to carbon-handling non-profits, etc.

Consider how much it will affect the decisions that people and businesses make - which is, of course, the entire point of tax credits.

The whole idea is to get people to do something they would not otherwise do - in the case of the Hybrid Car tax credit, pay more money for less car.  The purpose of the Hybrid Car tax credit is expressly to distort the market, in a way that makes sense to the politicians, but which may or may not make economic, practical, logical, or even environmental sense.  As a result, we get such bizarrities as the Lexus hybrid SUV, which gets worse gas mileage than the average conventional car -- but it still qualifies for the credit, because it's a hybrid!

Consider that there is now a congressional subcommittee on global warming.  The members of that subcommittee -- like the members of any congressional subcommittee -- want power.  The only way to get reelected to Congress is to continually buy back your seat with your own money or persuade rich friends to buy your seat for you by bragging about your results.  It's much harder to do the latter because you have to actually demonstrate that your subcommittee made some kind of difference.  For the eco committees, that means clubbing Americans over the head with the global warming scam so that green donors will come running.

Since tax credits are basically a way for politicians to redistribute wealth, remember that those politicians make the decisions on how it's distributed.

They induce bad financial decisions

The recent sub-prime mortgage mess is a good example how of the tax system encourages citizens to be fiscally irresponsible.

Inevitably, when a group of people begin to discuss home ownership, the conversation sooner or later turns towards tax incentives.  For decades, Americans have been able to deduct the interest they pay on their mortgage bill, which is a substantial part of each monthly payment for the first ten to fifteen years of the mortgage.  In fact, for the first several years, it constitutes nearly the entire payment.  On a $300,000 mortgage (at current prime), a home owner will be able to deduct more than $20,000 in interest the very first year.  This incentive may not be the entire reason a first-time buyer will take on a mortgage, but it certainly helps push them over the edge.

If these deductions didn't exist, many people would not have bought houses they couldn't afford.  Home-ownership can be a good thing for many reasons, but as millions are finding out now, it can also be a devastatingly bad thing if it's at the wrong time or on the wrong terms.  The interest-deduction tax credit, intended to encourage home ownership, has done so with horrible consequences.

Gambling is another good example of how tax credits and deductions encourage irresponsibility.  Lose your life savings in Vegas?  No problem.  You can always write it off your taxes, against your other winnings.  In turn, people take their losses less seriously, increasing the likelihood that they'll do it all over again.

What about tax cuts?

It depends on what exactly is meant by the term "tax cuts".  As with everything else, politicians define tax cuts to sound like the right thing when they're really going in a direction tax payers won't like.  In the proper sense, tax cuts are good because they give tax surplus back to the payer or shrink the amount of future payments.  In order for tax cuts to be legitimate, however, they must be applied fairly to all payers in a given bracket based on what they would be expected to pay.  Otherwise, they're nothing more than a form of tax credit, and we're back redistributing wealth again.

Consider the recent tax cuts as defined in President Bush's "economic stimulus package".  Individuals who paid zero taxes will receive $300.  In other words, the government has decided to take $300 out of your pocket and give it to someone who didn't pay any taxes at all, which is direct wealth redistribution.  In fact, the more money you paid in taxes, the less money you get back.

Those of you that are particularly incensed over illegal immigration, get ready to blow your fuse.  The stimulus package specifically states that non-residents (illegal immigrants) with a Individual Taxpayer Identification Number, known as ITIN, automatically get $300, and non-residents (illegal immigrants) that used that ITIN to file a return get $600.  How could this happen?  Drooling Democrats in the House hurriedly crammed in this clause at the last second, knowing that President Bush would never object since he needed quick signatures.

These particular tax cuts are even more egregious in that they are based off of borrowed money.  A comment was recently made that these "cuts" will stimulate China more than the US since we are a) borrowing money from China in the first place and b) asking consumers to use the money to buy goods which are, more likely than not, also Chinese made.

The only encouragement in the President's package is for individuals who work less and keep their hand out.  A more appropriate name would be "handouts-for-illegals, China-stimulating, low-income-incentive welfare package."  At least then we would all get the big picture.  It turns out we're not only borrowing money from the Chinese, but also their socialist ideology.

The Big Picture

Most tax-reform conservatives use every tax loophole they can pry loose in order to lower their tax burden.  And well they should.  The tax collector gives no one favors.

The point here is not that people shouldn't use tax loopholes when they are the only option, nor that tax credits and deductions are immoral.  Rather, that Americans are lulled into a false sense of "getting around" the problem by concentrating on the credits and deductions that make their burden lighter and their refund checks bulkier, instead of rising up together and shredding the system completely.

Credits and deductions, often referred to as "solutions for x" by the Ways and Means Committee, are no solutions at all.  They are government carrots, dangled in front of our noses to drive us onward through a monstrous mess of ineptness, theft and socialism.

When the first question of a financial decision for consumers is, "What's the tax write-off?" something is badly wrong.

This year, as you prepare your taxes, do not celebrate your various tax credits and deductions; abhor them as the failed government policy that they represent.