Are tax deductions subsidies? Many people think they are. Do tax deductions cost the government money? Many people think they do. Are tax deductions always a good thing? Many people say they aren’t.
Tax season is about over, so let’s do a little review.
Tax deductions, like tax exemptions, reduce one’s income subject to tax. Deductions and exemptions work the same way, but deductions are generally subject to more limitations, conditions, and exclusions. Subtracting from total income (line 22 on the 1040 tax form) all applicable deductions (lines 23-35) results in one’s adjusted gross income (line 37). Before the amount of one’s taxable income is calculated, from adjusted gross income is subtracted exemptions of $4,000 per person in the household and either additional deductions (itemized deductions from schedule A) or the applicable standard deduction.
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Then comes the tax credits (lines 48-54). Tax credits reduce the amount of tax owed on one’s income. Regular tax credits may reduce the amount of tax owed to zero, but if there is no taxable income to begin with, then no credit can be taken. Refundable tax credits (lines 66-69) are treated as payments from the taxpayer. If the tax credit “payment” is more than the tax still owned after subtracting the regular tax credits, then the taxpayer receives a refund of the money he never paid in. When this happens, refundable tax credits become a form of welfare, though they are rarely viewed as such.
Either way, one will pay less in taxes the greater the number, and the greater the amount, of deductions and credits that one qualifies for.
I recently came across an interesting story behind line 24 of the 1040 form, “Certain business expenses of reservists, performing artists, and fee-basis government officials.” NPR’s Jacob Goldstein recently interviewed New York actor Sandra Karas regarding “The Story Of Line 24: How Performing Artists Landed On The Tax Form.” Back in the 1970s, Karas became interested in tax deductions for actors. Taxes then became something of a hobby her. She took tax classes and started helping other actors with their taxes. Then, in the early 1980s, when Karas heard that Congress was going to make it harder for people to write off work-related expenses, she went to the head of the
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theater actors’ union in New York. After enlisting some other unions in the cause, he went to Washington and lobbied Congress “to pass a new law that made deductions even more valuable for performing artists.” This happened in 1986.
What caught my eye was something Goldstein said during the interview:
Deductions like the one Karas got for actors are the financial equivalent of the government writing people a check every year. They’re a kind of government spending, but they’re sort of hidden in the tax code, and that is kind of the point.
Goldstein has things backward. And this is a common misconception about tax deductions that many other people have.
Tax deductions are not subsidies. They don’t have to be “paid for.” They are not anything like the government writing someone a check. They don’t involve the government spending a dime. Tax deductions, like tax exemptions and credits, allow people to keep more of their money in their pockets and out of the pockets of our greedy, profligate Uncle Sam. It doesn’t matter what the tax deduction is for; the result is the same. Every penny of our money
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that we are able to keep away from the government is a good thing, whether it results from lower tax rates or an increase in tax deductions. All tax deductions are good; it doesn’t matter whom they benefit, how much they complicate or clutter up the tax code, or why Congress enacts them.
Only a statist who thinks the government is entitled to a percentage of every American’s income and that tax deductions deprive the government of its claim to that percentage could object to Americans holding on to more of their own money.
According to a new report from the Tax Foundation: “Americans will collectively spend more on taxes in 2016 than they will on food, clothing, and housing combined.”
Since the tax code and the IRS aren’t going away anytime soon, since the maximum tax rate will almost certainly never return to its initial 7 percent, and tax rates are unlikely to be reduced any time soon, the American people need more line 24s. They need more tax deductions. Just like they need more tax credits, more tax loopholes, more tax shelters, more tax incentives, more tax breaks, more tax exemptions, and more tax avoidance schemes.
