Tax Credits Little More Than Free Money

The government offers two types of tax credits. The first type reduces your tax liability, but the second type -- called a refundable credit -- allows you to wipe out your taxes owed and get cash from the government. It comes as no surprise that the Homebuyer Tax Credit program which is a refundable credit is plagued with fraud.

My friends, I have been a CPA for over 30 years so please let me share a basic principle with you: Whenever there is a refundable credit, fraud is not far behind – and the Homebuyer’s Credit program is no exception. The fact that a four-year-old took advantage of the program provided great entertainment. To nobody’s surprise, 53 IRS employees were cited for claiming the credit inappropriately or illegally eliciting a significant amount of schadenfreude.

We want to believe that our fellow Americans are honest and would never take advantage of a government program. Yet there is plenty of evidence that it regularly occurs. The Earned Income Tax Credit (EITC) has been around for years and has even been expanded four times, most recently in 2001. Because this credit is refundable, an industry has been created to defraud the government and checks are regularly mailed to non-qualified taxpayers.

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All these new credits add to the plethora of existing ones that complicate our tax code, confusing taxpayers and their tax accountants alike. There are at least 25 other credits listed on the main form, each of which has its own special form. What a bonanza for CPA’s and other tax preparers. Furthermore, each credit comes with its own lobbyists and special interest groups who work to educate taxpayers on how to take advantage of these hand-outs.

Here’s a little secret: Most tax preparers don’t completely understand these credits and certainly taxpayers are really clueless. They may be aware of the Adoption Credit or Energy Efficient Appliance Credit, but who would know about the Carbon Dioxide Sequestration Credit or the Indian Employment Credit? Would that be for hiring Native Americans or people from India? Many Americans – who call their credit card company or need help with their computers – probably think we hire too many people from India already.

Many Americans would like to claim the Distilled Spirits Credit, but unfortunately moonshine has been outlawed. Or how about the New Markets Credit – what is that about? Is that for opening a new Safeway or Kroger’s or maybe a Trader Joe’s? I am confused about the Orphan Drug Credit. Can you still take the credit if you adopt the drug? Is there an orphanage from which to pick these drugs?

Some of these credits appear to have outlived their original purpose. I mean why is there still a disabled access credit? The Americans with Disabilities Act was passed almost 20 years ago. You would think that everyone would have gotten the hint by now that they must make their buildings or equipment accessible to disabled individuals. Why are we still handing out money to do that?

Tax credits are not the answer; they are just another government handout. A growing economy that creates private-sector jobs comes from a policy of stable, predictable, low tax rates and limited, responsible regulation. If people have a job and can earn enough money to buy a home and make a monthly payment, do they really need a homebuyer’s credit? And would they have replaced their old car with a new one without wasting billions of taxpayers’ dollars?

This administration hasn’t the slightest clue how to create private-sector jobs and encourage economic activity. They don’t understand that predictable costs are a precursor to entrepreneurship and business expansion. Currently, employers have no idea what their health care costs will be or what liabilities they will be facing from the cap and trade bill. They don’t know whether payroll taxes will increase or whether they will have higher corporate taxes. With the huge government deficits, they have to be concerned about the value of the dollar in the coming years. They see these expensive government programs being promoted and they fear what comes next.

As Mr. Obama calls a national summit on job creation he needs to heed these facts. No amount of new tax credit programs will alter our behavior sufficiently to lower the current horrible level of unemployment. The people who will benefit are the CPA’s who have to figure them out and the people who establish new industries to take advantage of these new credits. Of course, the charlatans and the criminals will always be there as well.