Get ready for the debate on how to reduce the deficit | Eastern North Carolina Now

    Publisher's Note: Jim Bispo's weekly column appears in the Beaufort Observer

   The congressional Republicans don't seem too anxious to buy into the Anointed One's attempt to be drawn into class warfare in America. The Chief Community Organizer offers to do away with some so called tax expenditures (like those associated with corporate jet aircraft) and the republicans see it for what it is - another "tax the rich" scheme. If the Reps. buy into this ruse they can clearly be accused of increasing taxes - a notion that is anathema to many of the conservatives in Congress. How badly do you suppose the Chief Community Organizer is trying to mislead the public with all his protestations that the Reps are unwilling to cut "tax expenditures". We need to know what "tax expenditures are before we can make a reasoned judgment as to what's going on with the prez and his offers to reduce tax expenditures.

    So, what are tax expenditures??

    Government uses taxes for two broad purposes. The first is to collect revenue that the legislative branch appropriates to run the government. The second is to motivate behavior the government favors. A tax expenditure is government spending that is accomplished through the tax code rather than through the "appropriation process". In the "appropriation process", budgets are developed and presented to the Congress where they are dissected, reviewed in detail and finally approved and funded through an appropriation. Tax expenditures, on the other hand, are affected by policies which motivate individuals to spend money a particular way. If we, as individuals (or corporations) do as the government wants us to, the tax laws award us a "credit" which, in effect, "pays" you for doing as they desire (or because a particular "lobby" has managed to get a "goodie" favoring some particular group or activity into the tax code - and there are no shortage of those..)

    Tax expenditures come in at least two "flavors"; tax deductions or tax credits (two different things). We use the tax code to reduce taxes (by authorizing tax deductions) or increase refunds (by authorizing tax credits) for selected classes of people. Perhaps the best example of a tax deduction is the mortgage interest deduction which allows people paying interest on a home loan to deduct the amount of interest paid - which normally reduces the amount of that person's income that is subject to income tax. This is supposed to encourage more home ownership. Tax credits go toward reducing the amount of taxes you must pay or increasing the amount of your refund. They don't make the taxes any less; they make the tax refund more. (Yes Virginia, there is a difference.) They are figured after your income tax obligation has been calculated.

    Tax credits are further divided into two classes; refundable and non-refundable. A refundable tax credit which is larger than your tax bill will result in a rebate from the IRS. The amount of the rebate is equal to the amount by which the credit exceeds your tax liability. A non-refundable tax credit will reduce your taxes by the amount of the credit only down to the amount of taxes you own. Tax credits amount to little more than a government hand out that is intended to elicit a certain behavior (such as installing energy improvements on your residence) or as a "payback" to some group that was able to get it enshrined in the tax code - such as the first time homebuyer credit; surely the result of the real estate lobby. Once the credits are safely a part of the tax code, they are seldom looked at any further. They tend to become institutionalized rather quickly.

    As folks in Congress begin to pay more attention to so called "tax expenditures," we find the folks who are normally more than willing to raise taxes (in the often mistaken belief that higher taxes result in higher revenues) accusing those who would do away with, or reduce, tax expenditures of increasing taxes. That is the trap the prez was trying to lure the Reps into with his offer to do away with tax expenditures associated with ownership of corporate jet aircraft.) To the extent that eliminating tax deductions cause one's taxes to rise (i,e, without the deduction, your taxable income is higher and sure enough you will end up paying more taxes). And that seems to be the same argument used against reducing or doing away with all tax expenditures. Unfortunately the folks who use that argument often get away with it. By focusing on the deductions and ignoring the credits, they are addressing only one facet of tax expenditures.

    The other facet of tax expenditures is the money that is simply handed out to folks. These expenditures take the form of 'tax credits." People have children and they suddenly become eligible for tax credits (child tax credit, child and dependent care credit and the like). Or, if you don't earn too much money, you are suddenly eligible for the "earned income tax credit." As in Alice in Wonderland, earned income tax credits are actually the opposite of what the words usually mean. You "earn" a tax credit by not earning income.

    Believe me when I tell you that a lot of folks have figured out how it works and they control the amount they "earn" so as to maximize the amount the tax credit. There is, in fact, an entire class of people who deliberately choose to not work as much as they could so they will not earn so much income as to reduce their earned income "tax credit." This the result of the negative motivation provided by the government because, in effect, they pay people not to work or produce income.

    Ponder that for a minute and figure out what the motive might be for the government to reward people to not work. Do you suppose that it might be to make them dependent on the government, or more specifically on certain politicians who buy their votes by delivering goodies like the "earned income tax credit?" These politicians more often than not have a "D" behind their name.

    And then there are residential energy credits, credits for buying certain kinds of cars and more. The list goes on. It is difficult to see how bringing these handouts to a screeching halt can be considered to be a "tax increase." But try eliminating them and you'll be accused of raising taxes.

    And special deductions and credits are given corporations as well as individuals. There are, for example, credits for producing certain products, such as ethanol. Credits for depleting oil supplies out of the ground and of course in more recent months, credits for paying for employees' health insurance. And then, of course there are the agricultural credits.

    We need to stop letting folks get away with treating all reductions in tax expenditures as tax increases. The tax deductions could be interpreted that way; but it's not so clear that doing away with the so called "tax credits" (in particular the "refundable" portion of refundable tax credits) could even remotely be considered as a tax increase.

    Turning any proposal to get rid of tax expenditures into an argument that they are tax increases is quite misleading. Not all tax expenditures result in decreasing the amount of income that ends up being taxed. Some do; the rest do not. So perhaps we should be looking at those which do not and look toward getting rid of them.

    In the meantime, the administration seems bound and determined to create a culture of animosity between the so called "rich" and the rest of us. Class warfare by any other name is still class warfare. It is NOT what America needs - ever.

    Here's the link again to the explanation of how the deductions and credits are computed on your 1040 Tax Return: click here.

    D'ya think??