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Reason Foundation

Taxpayer's Guide to the Stimulus:
14. Tax Cuts and Tax Credits

Location in Stimulus Bill:
Division B, Title I

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Summary: An estimated $244 billion in tax cuts and tax credits will go to individuals, businesses, and research initiatives.

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The "cost" of any tax cut or credit is the amount of money the government will not receive in tax payments after the cut is passed. For instance, the stimulus allows taxpayers with three or more children an extra 5 percent credit of their income under a certain amount. It's difficult to know exactly how much less money the government will bring in, but whatever that figure winds up being is the “cost” of this tax break. Ultimately, the cuts are problematic because they are accompanied by higher spending. Tax cuts are most effective when the government also decreases spending. Tax and spend policy only increases the federal deficit, which in turn increases national debt, requiring higher taxes in the future to pay down our obligations.

"Tax and spend" policy is the biggest problem with this tax cut plan, but there are other issues. Though it is good to get more taxpayer money back into the hands of the taxpayers themselves, these tax credits promote the entitlement mentality that the government "owes" you for having children or buying a house. Separately, some of the tax cuts are actually increasing the tax burden on certain sectors of society. Because the "Making Work Pay" tax cut stops for those who make over $750,000 it means that those above the threshold will be paying a higher percentage of the nation’s taxes.

It is significant to note that these tax cuts, such as the "Making Work Pay" cut, will expire. Since tax cuts help the economy by giving individuals and businesses increased incentives for production, they should be made permanent. When taxes rates return to their previous levels in 2010 the economy will be harmed, increasing the likelihood of a “double-dip” recession.

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Written by: Anthony Randazzo. Please email with any comments or corrections.

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