Tuesday, October 14, 2008

The Meaning of "Refundable" Is...

Not all tax credit "refundables" are created equal.

Yesterday's Wall Street Journal took after Barack Obama's tax plan as a handout, regardless of taxes paid, to lower-income taxpayers. They say in "Obama's 95% Illusion"...

"Here's the political catch. All but the clean car credit would be 'refundable,' which is Washington-speak for the fact that you can receive these checks even if you have no income-tax liability. In other words, they are an income transfer -- a federal check -- from taxpayers to nontaxpayers. Once upon a time we called this 'welfare' ..."

Well now, wouldn't it be a crying shame if it were "welfare" in view of the fact that investment banks, mortgage companies and banks have just been granted $1 trillion+ in corporate welfare, on top of the already obscene corporate tax breaks for everything imaginable including shipping jobs offshore.

However, this WSJ analysis is very misleading. Obama's plan isn't welfare. Here's why, as shown in one of Obama "refundable" plans taken from his official website:

"A $1,000 "Making Work Pay" Tax Credit. For 95 percent of workers and their families-150 million workers overall-the "Making Work Pay" credit will provide a refundable tax cut of $500 for workers or $1,000 for working couples. This credit will benefit over 15 million self employed workers and for 10 million low-income Americans, will completely eliminate their federal income taxes."

As you can see, it doesn't say anything about giving taxpayers back more than they paid in taxes.... "will completely eliminate their federal income taxes".... it is meant to be a "tax cut" refundable directly against the amount of taxes to be paid.

Many times a "tax credit" is a formula that doesn't go directly to the bottom line but, for example, is applied to earned income subject to tax. What Obama means by "refundable" in this context is that it isn't a formula tax credit, but a credit to be applied directly to help "eliminate federal income taxes."

Now, let's take an example of John McCain's "refundable" tax credit from his official website....

"John McCain Will Reform The Tax Code To Offer More Choices Beyond Employer-Based Health Insurance Coverage. While still having the option of employer-based coverage, every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance. Families will be able to choose the insurance provider that suits them best and the money would be sent directly to the insurance provider. Those obtaining innovative insurance that costs less than the credit can deposit the remainder in expanded Health Savings Accounts."

McCain's tax credit is "refundable" yet goes directly to the insurer. As the wording says.... "effectively cash".... or cash out in the ether somewhere, with the credit going directly to insurance coffers.

And, image finding "innovative" insurance for a family that costs less than $5000 a year. Even if you could, the difference still isn't given to the insured, but is deposited in accounts. McCain's "direct refundable tax credit" never directly touches taxpayers hands.

On top of the never-to-be-directly-seen McCain tax credit boondoggle for insurance companies, McCain's proposal calls for employer insurance benefits to be taxed as income.

So, it's McCain who has the "Washington-speak" direct refundable tax credit, and Obama who is offering the actual tax cut... as a credit against taxes due.

It all depends on what the meaning of "refundable" is.

November 4.

1 comment:

Anonymous said...

Hi, although I do not completely agree with you on the meaning of "refundable", I have to commend you on a very interesting analysis with solid data. Thanks.