Wednesday, April 23, 2014

Tax credits are unfair to poor people

How come nobody ever talks about this?

I'm referring to the common practice of structuring government subsidies in the form of tax credits, meaning amounts that you get to deduct directly from your tax bill (as opposed to tax deductions, which are subtracted from your taxable income). For example, the $7,500 tax credit on electric vehicle purchases.

For a rich person who pays more than $7,500 in income tax, this benefit is worth the full $7,500. In fact, it's worth a good deal more than that because in order to take home $7,500, a person in the top Federal bracket would have to earn about $12,400—even more in states and cities that add their own income tax.

So, for a rich person, that new electric car is quite affordable. But for a poor person, not so much. If you don't pay income taxes, the tax credit is worth precisely zero, and you'll pay full price for that new Leaf.

So why should the government subsidize electric cars for rich people, but not for poor people? In this perverse world, the people who need the subsidy don't get it, and the people who don't need it, get it. It seems to me that a much fairer policy would be for the government to send a $7,500 check to the purchaser, which would be added to their taxable income. This would make the subsidy less valuable for the rich than for the poor, and increase revenue to the Treasury.

I'm not sure if it's still in force, but there once was a program that gave tax credits to people who invested in affordable housing projects. This is a lot more defensible because (a) poor people aren't likely to make these kinds of investments anyway, and (b) the effect of the tax credit is to raise the effective rate of return on the investment, making it more likely that the rich would choose to invest their money in something socially beneficial. I get that. I don't get the electric car thing.

Yet another example of tilting the playing field in favor of the wealthy.

Labels: ,


Post a Comment

<< Home