Monthly Archive: August 2009

Tax vs. Direct Government Subsidies

While the debate goes on whether to pump more tax dollars in the Cash for Clunkers program, it may be time to step back a bit and ask how the current administration’s program differs from past government hand out programs. The Cash for Clunkers programs gives cash back to a special targeted group of Americans.  In the past the United States Tax Code has generally been the major vehicle through which subsidies were doled out to special interest groups.

Many of remember the investment tax credit, accelerated depreciation, education credit, child care credits as well as hundreds of deductions to help folks who owned homes, gave to charity, and started small businesses.  Politically, the United State has been reluctant to give direct subsidies to special targeted groups except through the tax code.  For example, the child tax credit is an indirect subsidy to those Americans who have children.  But past President’s could not just hand out money to folks who had children; that would have been considered discriminatory against those who were childless, or who were unable to have children.   Perhaps the use of the tax code for indirect subsidies has masked the discriminatory nature of helping a targeted class of American taxpayer.

However, the tax Code subsidiary is different from a direct government subsidiary in another important way, in that the out-of-pocket cash to the US Government is not as immediate as it is with a direct subsidy.  For example if the Clunker Cash was disguised as a tax credit, the taxpayer would not only have to purchase the car, but also file a tax return, and more importantly make sufficient income to take advantage of the tax credit on his or her tax return.  The US Treasury might have to part with revenue on the tax credit, but make it up with other income the taxpayer earned during that year.  With a direct government subsidy such as the current Cash for Clunkers, government funds are given immediately to Americans who simply have old cars.  By separating the subsidy from the tax return, the treasury is out the money with no guarantee of a return on investment on the taxpayer’s income tax return.   It is my view that elected officials may want to reflect on whether or not such programs are in the best interest of all the taxpayers and whether such direct subsidies should be used again in the future.