So can someone explain the big difference between tax credits and tax cuts?

[Magus]

Having a difficult time with this one. See, Obama's new jobs bill contains mostly tax credits, which John Boehner (the Speaker of the House, and of the opposite political party, for those of you foreign to our wacky political hijinks) has a problem with. He feels we should instead have mostly tax cuts (well, I said "mostly" to give him some credit, since I think he has said pretty much 100% tax cuts as far as I can tell).

However, I have a difficult time telling the difference between the two. As far as I can tell, a tax credit is basically the same thing as a cut except you get the cut via a monetary reimbursement for doing something the government wants you to do (such as hire people). A tax cut is just where you never pay the taxes in the first place, also possibly with stipulations (except presumably Boehner is against such stipulations as "hiring Americans" or what have you). They seem to amount to the same thing so if there's another difference I'd like someone into economics to explain it to me, if anyone here is an economist or sociologist or even just a major in one of those things.

It would just seem silly if a politician were to basically support pretty much the same thing as another politician but use slightly different terminology in order to make it appear as if they are actually at loggerheads in order to score political points.

[Eltargrim]

Not an economist, but those stipulations are the big difference. The idea is that they incentivize a behaviour which may otherwise be counter to the interest of the company, ie hiring people rather than holding onto cash, or buying green appliances, or in the case of Canada, buy a bus pass rather than driving a car. You promote a beneficial behaviour, and reward the behaviour with saving money.

With tax cuts, they just have extra money. There's a belief that the extra money will be used in beneficial behaviours, but that hasn't really played out (See: tax holidays, the failure of trickle-down economics, the current state of employment).

Tax credits provide a reward for good behaviour, while tax cuts assume that good behaviour naturally occur.

That is my understanding as a decently-read layman; please correct me on points if I've misconstrued something.

[Ecks]

tax credits are something all true warriors strive for

tax cuts are something the GOP wants, and we all know that the GOP is a soulless, lifesucking devil machine.

[Magus]

Originally Posted by EckScizor

tax cuts are something all true warriors strive for

tax credits are something the Democrats want, and we all know that the Democrats are a soulless, lifesucking devil machine.

Just thought I'd provide the John Boehner version.

FAIR AND BALANCED ALL UP IN HERE

So tax credits are like rebates and tax cuts are like discounts, sort of, and the product you are supposedly buying is BETTER AMERICAN ECONOMY but technically with the cuts you could use the money saved to buy BETTER AMERICAN YACHT.

[Amake]

Tax credits seem like it's just a way for the government to do stuff with your money* (you know, kind of how TAXES are supposed to work), while tricking people that they're not paying taxes, which I figure they will believe because they want to.

[Sky Warrior Bob]

I think tax cuts are across the board cuts in what you need to pay for taxes. Tax credits, are things you have to qualify for, for doing something, or just being part of a demographic.

Both cut your taxes, but when it comes to credits, they have a specific intent in mind, while cuts aren't as necessarily well thought out. And you don't have to do anything specific to earn them.

SWB

[P-Sleazy]

The best way to explain this is with an example.

John and Jane both make 50k a year. Lets say they both pay roughly 12k in taxes a year. Now, John will have cuts exercised on him and Jane will have Credits.

John gets a 10% tax cut to his taxes. He does nothing. He saves 1,200 dollars with his tax cut. He likes to save money so he doesn't spend it and just puts it in a savings account accruing 2%/yr. Next year his 1,200 only grew to $1,224. $24 taxed at 15 percent (flat tax on investment/interest income) is...$3.60. So thats $1196.40 that the government loses out on if John saves. If he spends all the money, all government gets is whatever sales tax is and the tax rate on the stuff he spent it on is. Lets say sales tax is 7% and he spends all $1,200. Thats $80 that goes into sales tax and $1,120 that is spent on actual products. now the sellers of those products have 23% tax rate on profits. Those profits are $527. The total tax they then pay on this is $121. So the total that the government loses in revenue ends up being (1200-[121+80]) $999

Jane however options into the $2,000 tax credit for buying a new car. The car costs $17,000, but with the tax credits, Jane still spends $17,000 on the car (which she can't afford so she gets a $7,000 loan at 4% interest), but gets to pay $2,000 less in taxes for the year. So the total effect Jane's purchase is still $17,000 to the car seller, and she owes a bank 7,000 plus accrued interest. Which the bank likes, cause then that means the bank makes more money. Lets say Jane pays the loan off over 24 months (one payment a month of $303). The total amount of money she pays back is $7,300.

Now if we also go back to the seller of the car, he sold a car for $17,000. After he takes out his cost to make/sell car, lets say he profits $8,000 (47% profit, yes unreasonable, but just to keep numbers simple and the same as above) off of that car alone, but his tax rate is 23%. So he has to pay the government $1,840 in taxes (of course this is mixed in with all the other cars he sold that year).

Now lets go to the bank, which made $300 in interest on that loan. Interest is taxed at a nice 15% rate. So the bank ends up paying $45 in taxes on this loan to the government. So the true loss to the government on giving this $2,000 tax credit to Jane actually only becomes (2000-[1840+45]) $115. This also doesn't include the property taxes you have to pay for the car over the time you own it (but that is best left alone just cause tax credits can vary for purpose).

As such, the government is more atp at being able to recover from giving you a tax credit as opposed to a tax cut, even if tax rates remain the same on the supplier side (which they will vary). And of course what you give tax credits on also varies. Like the child tax credit. You get 3k for each child for the first 3 or something like that. But you easily spend much more per child on any given year.

[Fifthfiend]

The difference is that Boehner doesn't actually give a shit about any of the things he's pretending that tax cuts are needed to do.

Republicans like to pretend that tax cuts for the rich result in jobs - because you know, when you give people who already have a fuckton of money and aren't using it to give people jobs, obviously you need to give them more money so that they can add it to the money that they aren't using to give people jobs, and... ??? - because that's the best lie they've come up with in order to cut taxes for rich people so that rich people can have even more money, and so naturally they get very upset when someone tries to actually do something that will result in people having jobs, instead of going along with their transparent lies.

Tax credits would be exactly like tax cuts if tax cuts were actually going to result in the shit that Republicans pretend they'll do, and these tax credits presumably have attached conditions requiring employers to do the things that tax cuts will do, but tax cuts aren't actually any of those things and are instead free money for rich people, so, there you go.

[Ecks]

And, per Fifth's far more eloquent and nicely worded reply, I stand by my ridiculous statement earlier in the thread.