Monday, November 10, 2008

Use of Refundable Tax Credits Has Grown in Recent Years

From Wall Street

Republican presidential candidate John McCain has taken to calling Democratic rival Barack Obama's tax plan "socialist," because it would give tax cuts to people who currently pay no income taxes.

But such proposals -- known in tax parlance as "refundable tax credits" -- have become increasingly common in recent years, supported by both parties. Sen. McCain himself uses them as the cornerstone of his health-care plan.

"Traditional welfare is frowned upon by the public, and government spending is similarly frowned upon," said Scott Hodge, president of the Tax Foundation, a nonpartisan research group in Washington. "So politicians are looking at new ways to deliver targeted benefits ... and by delivering it through the IRS, it sounds far more palatable to the public."

Refundable tax credits have become increasingly popular over the past two decades, as a series of tax breaks have allowed more households to eliminate their income-tax liability altogether. President Bill Clinton's welfare overhaul relied on expanding the earned-income tax credit, which is for low-income working individuals and families and is designed to provide an incentive to work. President George W. Bush's 2001 tax cuts increased an existing child tax credit, and made it refundable so households that didn't pay taxes could receive it.

Currently, 62% of households pay income taxes, down from 82% in 1984. Some 57 million tax filers don't pay any federal income taxes, according to the Tax Policy Center, a nonpartisan Washington think tank.

Sen. Obama, who says he wants to give 95% of all households tax relief, makes his case by saying that he is offering most Americans tax relief. His plan counts on raising taxes on individuals earning more than $200,000 a year and families who make more than $250,000 a year.

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