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.

>> The Major Provisions
    "Making Work Pay Tax Credit" (estimated cost $115 billion)
  • This credit will provide a $400 rebate ($800 for families) on income taxes for workers who make at least $6,452 a year. Those who make less will receive 6.2 percent of those paychecks. For individuals who make over $75,000 a year ($150,000 for a family), the credit will be reduced, and the greater the earnings the less the tax credit will be. This credit will come in both 2009 and 2010.

    This tax cut will reduce the overall collection of FICA taxes, the 6.2 percent taken from paychecks to pay for Social Security.  Although this would allow workers to keep more of their hard earned wages, it places further stress on a Social Security system that is already plagued by financial problems. 
    "Alternative Minimum Tax Patch" (estimated cost $70 billion)
  • The Alternative Minimum Tax (AMT) was designed to prevent high income earners from avoiding taxes, but has since had unforeseen consequences, causing many Americans to be subjected to a higher than necessary tax rate. Each year since AMT was passed Congress has passed a "patch" to adjust the AMT standards for that year and keep families from paying the higher tax rate. The patch for 2009 was passed with the rest of the stimulus and considered part of the overall cost.
    Renewable and Efficient Energy Incentives (estimated cost $20 billion)
  • The stimulus includes over 40 tax incentives for renewable and efficient energy research, including a $7,500 tax credit for buying a new plug-in electric vehicle, up to $50,000 for building an alternative fuel station, and various tax credits for developing energy efficient means of creating electricity through wind, solar, or other means.
    "Child Tax Credit" (estimated cost $14.8 billion)
  • This credit will increase the tax credit amount per child. IRS code currently gives families a tax rebate of up to 15 percent of all their income over $8,500. The stimulus expands the tax credit by lowering the threshold to $3,000.
    "American Opportunity Tax Credit" (estimated cost $13 billion)
  • This credit increases the maximum college education tax credit from $1,800 to $2,500 maximum, and makes the credit available for all four years of college instead of the current two year limit. The tax credit can be claimed for all college expenses, not just tuition, but it is reduced for students whose parents make over $160,000 as a family.
    "Bonus Depreciation" (estimated cost $5 billion)
  • When businesses buy new assets, they pay taxes based on property values. Over time it is assumed the value of an asset will decline, due to use and other factors. The stimulus extends a 2008 law through 2009 that allows businesses to consider the value of new asset to be only half of fair market value in the first year of ownership for tax purposes.
    "First-Time Homebuyer Tax Credit" (estimated cost $3.7 billion)
  • This credit will increase the tax rebate that first-time homebuyers get to $8,000, but only for homes purchased by November 20, 2009. The amount of the credit is reduced for families making over $150,000 a year. It interesting to note that the definition of "first-time", because most people who haven't owned a home in the past three years will apply for this credit, even if they have owned a home in the past.
    "Operating Loss Carryback"
  • The stimulus increases the amount of operating losses that businesses are allowed to deduct from their taxes. Under current law, businesses can deduct losses from the previous two years; the stimulus increases that, allowing firms to get a tax refund equal to their losses from the previous five years.
    Individuals
  • Unemployment checks up to $2,400 will become tax-free under the stimulus plan, and benefits from employers for transportation up to $230 will not be considered part of a worker’s gross income for tax purposes through 2010. The $2.5 billion "New Motor Vehicle Tax Credit" will increase the tax rebate states offer by using Federal money to compensate state budgets.
    Businesses
  • The stimulus extends a 2008 law that increases the amount of expenses small businesses can write off of their taxes through the end of 2009. Section 1221 gives firms a special tax credit for hiring people from highly unemployed demographics. Also, the "Reduction for S Corp Built-In Gains Tax" makes it easier for firms to transition from being under "C Corp" law, which taxes business income, to being under "S Corp" law, which doesn’t levy business taxes.
    Bonds
  • The stimulus authorizes the government to raise money by selling new types of bonds and increasing the sale of old bonds (like stock in the government). The IRS has a complete list, but two of the notable bonds created are the new "Recovery Zone Bonds" that will raise money to invest in economic recovery zones in dire circumstances. Also, the "Municipal Bonds" will make it easier for local government's to fund additional projects beyond the stimulus.
>> Commentary

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.

More from Reason on Tax policy.

>> Government Recovery Websites

Internal Revenue Service: http://www.irs.gov/recovery/


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


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