September 12, 2008
Joe Klein of Time Magazine Latest to Botch "Tax Credit" Versus "Tax Deduction"
Washington, DC, September 12, 2008 - With 53 days left to go in this year's Presidential race, basic tax facts have been tossed out the window by some reporters and columnists, according to Gerald Prante, senior economist at the Tax Foundation, who has monitored the Presidential candidates' plans on taxation.
Sen. John McCain's proposal to provide health tax credits has been the subject of the latest misinformed commentary and attack, and Prante explains that the plan is not that complicated. This huge, new subsidy for health insurance would be partially offset by the removal of a different subsidy, the tax exemption for employer-provided health care. Exemptions are not nearly as valuable to taxpayers as credits because they're not subtracted from what a taxpayer owes. Instead, they're subtracted from a taxpayer's taxable income.
"Each single taxpayer with health insurance, whether provided by an employer or purchased on his or her own, would get a $2,500 refundable tax credit (couples would get $5,000)," says Prante. "While the current exclusion tends to favor those with valuable employer-provided health insurance plans and those in higher tax brackets, McCain's refundable credit would actually reduce the tax liability of most tax returns, especially those in the middle-income groups. That's why the Tax Policy Center's preliminary estimate has it actually costing $1.3 trillion over ten years."
But yesterday, Joe Klein of Time Magazine claimed in the "Swampland" blog that McCain "is actually proposing a tax increase on health care benefits for American workers" and that McCain wants to "tax your employer-provided health care benefits" and "replace those benefits with an insufficient tax credit" because "the average cost per family for health insurance is $12,000." Unfortunately, Klein appears not to understand how a tax credit works as he compares the $12,000 average family cost to the credit amount ($5,000).
"What Klein fails to comprehend is that the $5,000 value of the credit would be worth more than the current exclusion for almost any taxpayer," Prante points out. "For instance, a family in the 25% bracket would have its income tax before credits increase by 25% of $12,000, which is $3,000. However, the family would be getting a $5,000 credit that would trump the $3,000 extra in taxes from the elimination of the exclusion. Even for a family in the 35% bracket, the family having $12,000 in insurance would come out ahead."
Prante urges all journalists and columnists to learn the basics of the tax code, and the difference between a tax exclusion and a tax credit, before they report or comment any tax matters.
"Credits are dollar-for-dollar reductions in taxes," Prante explains. "The value of an exclusion to a taxpayer depends on the tax rate one is in."
Klein's blog post can be found at: http://www.time-blog.com/swampland/2008/09/mccains_health_care_tax_increa.html
Prante's response can be found at: http://www.taxfoundation.org/blog/show/23599.html