Tax Credits Can’t Stimulate Me

“If line 55 is more than line 46, enter -0-”—Internal Revenue Service, Form 1040, line 56.

In a couple days, I will buy a house.  I’m arranging to install a heat pump with a ground loop heat exchanger.  (That’s a form of solar energy, not geothermal.)  There is a federal tax credit that would reimburse 30% of my expense up to $2,000 for this bit of shovel-ready infrastructure development, but I will receive almost none of that.  In addition, Congress is thinking of dangling before me an alleged $15,000 tax credit for being privileged enough to buy a house.  (We chose to ride out the bubble by renting the past five years.)  This credit is supposed to motivate buyers and puff the real estate bubble back up, but for me, it offers absolutely no incentive.

For 2008, my federal income tax bill was $2,700.  For 2009,  mortgage interest will be deducted from my income, and an additional dependent will become part of our household, so it will be impossible to cut my income tax bill further; it’ll already be zero.  This situation produces two contradictory concerns.  The first is that a $15,000 credit for home purchases will be fully utilized only by people with high incomes; it is very literally a tax break aimed at the rich, those who otherwise would owe more than $15,000 on their income taxes, people like Secretary of the Treasury Tim Geithner when he remembers that he receives income.  The second is that there shouldn’t be citizens who shoulder no portion of the federal income tax.  My household is larger than most, but our income is somewhere around the 80th percentile, so if I won’t pay income tax for the next few years, who will?

Two more observations: 1) Conservatives say the best economic stimulus is a tax cut, but as I’ve described, there is a structural limit to what is possible in that direction regarding income tax.  Not that deficit-financed government spending binges are any better. 2) Federal income tax is only one portion, often a minor portion, of taxation in America. There is little in the way of deductions and credits for Social Security taxes and sundry excises.

One more thought: If the President and Congress want to spend a lot of money in a hurry in a capacity-enhancing fashion, $100 billion spent to drill 10 million ground loop heat exchangers would be one of the more useful ways to pay people to dig holes in the ground.

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About John Mansfield

Mansfield in the desertA third-generation southern Nevadan, I have lived in exile most of my life in such places as Los Alamos, Baltimore, Los Angeles, the western suburbs of Detroit, and currently the northern suburbs of Washington, D.C. I work as a fluid dynamics engineer. I was baptized at age twelve in the font of the Las Vegas Nevada Central Stake Center, and on my nineteenth birthday I received the endowment in the St. George Temple. I served as a missionary mostly in the Patagonia of Argentina from 1985 to 1987. My true calling in the Church seems to be working with Cub Scouts, whom I have served in different capacities in four states most years since 1992. (My oldest boy turned eight in 2004.) I also currently teach Sunday School to the thirteen-year-olds. I hold degrees from two universities named for men who died in the 1870s, the Brigham Young University and the Johns Hopkins University. My wife is Elizabeth Pack Mansfield, who comes from New Mexico's north central mountains and studied molecular biology at the same two schools I attended. We have four sons, whose care and admonition, along with care of my aged father, require much of Elizabeth's time. She currently serves the Church as Mia-Maid advisor, ward music chairman, and choir director, and plays violin whenever she can. One day, I would like to make shoes.

16 thoughts on “Tax Credits Can’t Stimulate Me

  1. I wonder what my taxes would be with 14 dependents. Any tax credits for fertility treatments? ;-)

    Seriously, though, my wife complained to me that we were only getting $53 in combined refunds from Federal and State. I modified my W2′s so I would get as close to zero refund as possible. I don’t like giving the government an interest-free loan.

    I’m sure the heat pump is a great idea for colder climates. Got any ice pumps for the desert southwest?

  2. John, you are correct. Tax credits often look and sound good, but in practice they are sometimes a perverse incentive.

    But look on the bright side — if any administration appointees want to claim the $15,000 credit, they will at least have to file a tax return and report their income. That will be a new experience for some of them.

  3. With all due respect to Mr. Geithner (any?), he didn’t have a problem “remembering” income. That was Mr. Daschle’s problem. Geithner “forgot” to pay self-employment tax on income that he reported, and paid income tax on–since he was not in fact self-employed we might excuse his failure, but for the fact that his employer, the IMF, made disclosures, had him sign an acknowledgement that he was responsible for the SE tax, and four times a year gave him a “bonus” so that he could make the required estimated tax payments.

  4. John M, you have spotted an interesting trend, ie, the fact that most middle-income people these days don’t pay very much in income taxes. We are relying on our richest to finance the entire country. Not a pretty picture.

    (Yes, it is true that social security and FICA are paid by the poor as well and are a higher percentage of their incomes).

    We will find in about a year when our current stagnation continues that sending people checks also doesn’t stimulate the economy because it creates temporary, one-time incentives, rather than long-term incentives encouraging investment. We should have learned that last year when we sent out checks and nothing happened, but politics trumps all…

    What has been proven to stimulate the economy again and again (Kennedy, Reagan, Bush, etc) are long-term, predictable tax cuts in tax rates. In addition, tax cuts in capital gains and corporate tax cuts will also stimulate the economy by encouraging people to invest. Unfortunately, that is not what is being discussed in our current stimulus. Sigh.

  5. It’s an interesting problem, Geoff. I think a degree of progressive taxation is sensible, but in a sense, the country belongs to who pays for it. I’m a citizen and the country belongs to me, so send me my bill.

    Cutting capital gains tax is another interesting problem. Is it fair for income earned by investing to be taxed at a lower rate than payroll income? Maybe not, but it’s not a question of fair; it’s a question of incentives. We wage slaves have to keep going to work regardless of tax hikes, and we’re not going to increase our hours much if our taxes are cut in half. Capital investment is probably much more elastic with regard to the cut taxes take out of gains.

  6. There is nothing stimulating about the current “stimulus” bill. Real money doesn’t grow on trees. The increased federal debt will weaken the currency, promote inflation, and raise future taxes. The temporary jobs created come at a cost of $233,000 each. And why should people from fiscally responsible states subsidize the profligate travesties of states like California?

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  8. John M., An equal capital gains tax would be fair if the government did two things: (1) Eliminated the double taxation inherent in the corporate income tax and (2) Allowed capital gains to be indexed for inflation.

    Corporations are economic proxies for the shareholders. Large ones pay ~30-40% corporate income taxes. If we keep the corporate income tax as it is, the capital gains on sales of corporate shares should be zero as a matter of equity. Corporate dividends should only be taxed once as well.

    On the other hand, capital gains on real estate, fine art, gold, etc. should be taxed at the ordinary rate (after indexing for inflation) because no other federal tax has been paid.

  9. Mark D., I agree with your point about inflation. I remember listening to Robert Reich on the radio complaining that there should be a tax on wealth, and I thought “Hasn’t the man ever heard of inflation?”

    On double taxation, though, I agree with Tom the Dancing Bug.

  10. Is this 15k tax credit refundable? If so, then you receive up to 10% of the purchase price of your house (up to 15k) regardless of your tax liability.

    At least that’s the way it’s working for the current 7.5k tax credit currently in place.

  11. John M., The “Tom the Dancing Bug” argument is specious. A corporation is owned by its shareholders. The plumber’s customers do not own part of the plumber, nor the do the grocery store’s customers own part of the grocery store.

    In addition, the TTDB cartoon does not make a distinction between net and gross income. The plumber does not pay income taxes on the amount he receives. He pays taxes on the amount left over after deducting the cost of all his supplies, business expenses, payments to his employees, and so on. If he has employees, that is probably 15% or so of what he bills.

    Now consider the corporation the same way for purposes of argument. If the shareholders aren’t “special”, then any dividends the corporation pays out must then be business expenses, like interest on loans from the bank. Corporations do not pay taxes on interest on bank loans, so why should they then pay taxes on “interest” they pay to their shareholders?

    This differential by the way, is one of the reason why the economy is so unstable – there are enormous tax advantages to businesses borrowing money instead of raising common equity.

    Finally, we can practically guarantee that virtually every plumber in the country is not operating as a sole proprietorship for liability reasons. So if double taxation is such a good thing, why don’t we eliminate the corresponding exemption given to S-corporations and LLCs? Then the plumber can pay 30% taxes as a corporation, and 30% again as an individual, plus state and local etc. It might tank the economy, but it would be the fair thing to do right?

  12. Mark D’s larger point, regardless of whether the TTDB cartoon is tongue in check, is valid, which is that tax regulations for businesses large and small create a huge amount of disincentives for long-term investment, which means they hire fewer people and grow more slowly than they could.

  13. I have been arguing for a long time that nothing would be better than getting rid of all these deductions. One of the most pernicious is the mortgage deduction, the bitter fruit of which we have recently witnessed as people were sold houses or refinancings or equity loans they couldn’t afford, based partly on the lure of a tax break (only to find that they get hit with a big property tax). Of course, they also had hopes of endless appreciation.

    Zakaria points out in the most recent Newsweek that Canada has no mortage deductibility, hence no incentive for overconsumption. Also no banking crisis.

  14. By the way, it looks like in the compromise bill they only upped the credit to $8,000 from $7,500, not the $15,000 the Senate was going for.

    The original credit, enacted in July of last year is available for first-time home buyers only. The maximum credit amount is $7,500. The credit is available for homes purchased on or after April 9, 2008 and before
    July 1, 2009. Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
    The tax credit works like an interest-free loan and must be repaid over a 15-year period.

    The new bill, however, applies to homes bought between Jan 1 and Aug 31 of this year and waives the requirement that the loan be repaid. It doesn’t broaden eligibility as much as the Senate bill wanted.

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