Today, many government transfer programs are run through the tax code. The Earned Income Tax Credit (EITC), which we discussed in this chapter, is one important example. The federal government also has a variety of other “refundable tax credits,” that is, spending programs run through the tax code. These blur the line between “tax breaks” and “government spending.” This may explain their popularity: Voters and politicians who like tax breaks can claim that these programs are tax breaks, while voters and politicians who like higher government spending can claim that these programs are government spending.
a. Your income is $20,000 per year. You pay your initial tax bill of $5,000 but the government sends you a $1,000 tax refund because you have a young child. What is your after-tax income, including the value of the government check?
b. Your income is $20,000 per year. You pay your initial tax bill of $5,000 and the government sends you a $1,000 check because you have a young child. What is your after-tax income, including the value of the government check?
c. Your income is $20,000 per year. You pay your initial tax bill of $500 but the government sends you a $1,000 tax refund because you have a young child. What is your after-tax income, including the value of the government check?
d. Your income is $20,000 per year. You pay your tax bill of $500 and the government sends you a $1,000 check because you have a young child. What is your after-tax income, including the value of the government check?
e. In which of these cases does the government check seem like “government spending” to you, and why? You may find more than one case applicable—this question borders on the philosophical.