Credits and Cuts are not the Same Thing

"Tax cuts" have become the cry of the day as the stagnate economy shows little signs of turning in a positive direction. Our leaders have been actively selling the "tax cuts" they have, or are planning to institute. The only problem is that they are not offering "tax cuts", rather "tax credits" and by no means will these policies have the effect the public is looking for.

Both "tax cuts" and "tax credits" refer to reducing the tax burden, but they differ at the point of application.

"Tax cuts" refer to lowering the amount of liability a taxpayer would have. Examples would include lowering the rate of sales tax or income tax. Less money is collected by government and allowed to remain at the discretion of the taxpayer.

"Tax credits" are used to lower the amount the taxpayer owes, without reducing their total tax liability. Taxpayers still turn over the same amount of money to the government and receive the credit when filing their annual return. Credits are rewards used by the government to direct social behavior.

Anyway the tax burden is reduced, it will have a positive effect on the general economy. The big difference is that tax cuts would apply to a larger percentage of the public, as were the tax credits only apply to taxpayers who qualify. In Canada, the Conservative minority government offered tax credits in the budget to aid in home renovations. If you spent to a maximum of $10000 you would receive $1350 in a tax credit. That works out fine if you are a home owner, but not all taxpayer qualify. President Obama is offering a range of credits(which he has labeled cuts)to encourage consumers to purchase "Green" products, such as energy efficient widows and home insulation. These credits have the same overall deficiency, they only apply to the taxpayer who can qualify.

The fact that credits don't apply to the general taxpayer is the very reason they won't be as effective as the public hopes. These credits would be more useful in times of economic growth to bolster growth to certain areas of the economy or to encourage upgrades to newer technologies. In a stalled economy they have a limited effect. Credits do not necessarily increase consumer spending, rather encourage spending that would have taken place anyway, by those who can afford to spend. Where as cuts would immediately raise the level of discretionary spending to all taxpayers and create long term stability.

So why not "tax cuts"? The answer is simply political ideology. In Canada, the minority government would be unable to pass a budget with sweeping tax cuts and the opponents on the left would force an untimely election. If President Obama was to propose real tax cuts, he could possibly lose his support on the left and in turn be destined to lose the 2012 election.

The idea that government is better able to spend money is arguably what has caused the recession and is most defiantly what is slowing the recovery. At this time, if governments around the world would lower tax rates, there would be an immediate increase in consumer and manufacturing activity. That would mean though, the progressive left would have to admit people are better capable to spend their own money then government, and that is just not going to happen.