Nathan Newman

Kerry's Tax Credit Fiscal Trick

Democrat John Kerry said April 21 that if elected president he will cap federal spending and acknowledged that doing so will require him to cut some of his campaign promises. "When I say a cap on spending, I mean it,'' Kerry said in a speech at Georgetown University. "We will have to make real choices -- and that includes priorities of my own.'' -- Associated Press

John Kerry's fiscal policy has some serious problems, but don't mistake his rhetorical stinginess for Reaganomics.

With great fanfare, Kerry announced that he was advocating that all discretionary spending, other than education and security, would increase no faster than inflation. While that sounds reasonable in rhetoric, if you have a growing population -- which we do -- increasing spending in a category only as much as inflation means that the money has to be divided up between more people each year.

Which means an inflation cap is a net cut in spending per person. And "discretionary spending" includes everything from aid to poor families to funds for roads and highways, so a net cut in spending per citizen would be disastrous.

This sounds dangerously like Kerry is taking a major detour into rightwing economics.

The Tax Credit Trick: But the key trick in Kerry's rhetoric is that he opposes new spending, but supports lots and lots of "refundable tax credits."

What's a "refundable tax credit"? Money the government gives people that can only be used for purchasing a particular social service, and that is available to every person, regardless of whether they pay income taxes or not.

Sounds a lot like government spending by another name, doesn't it? What's on Kerry's list?

• Health care tax credits for employees of small businesses equal to half the cost of coverage -- which will be through giving such employees access to the existing Congressional Health Care plan.

• Unemployed workers would receive a tax credit of 75% of the cost of health care coverage.

• A college tuition tax credit of $4,000 of yearly tuition, assumably on top of existing Pell Grants, which would be a dramatic expansion of access to college for poor and working class families.

• An "after-school tax credit" so every family can pay for child care until the parents get home from work.

Kerry also has a number of tax credits for jobs, such as paying the payroll taxes of new hires.

The loophole here is that Kerry can talk about "freezing spending," while increasing government aid to working families by calling it a "tax cut" -- then paying for it with cuts in "corporate welfare" -- raising taxes on corporations. Kerry cites a study, done by Sen. John McCain that highlighted $65 billion in spending on 100 corporate subsidy programs. Cutting those programs would help raise the money to pay for Kerry's tax credits.

The end result would then be more taxes paid by corporations, more spending on health care, college aid and child care, and Kerry can virtuously declare that he hasn't made any net increases in taxes.

It's a nice rhetorical game and contains some very progressive and large spending increases.

The Problem with Tax Credits: The issue with tax credits is that the Internal Revenue Service is not a very competent social worker. Their eligibility rules are confusing for different credits and poorer folks can be quite intimidated by dealing with the IRS to get their money.

In an ideal world, we'd just have universal health care and child care paid for by the Health and Human Services Department.

But if Kerry can politically sell $200 billion in "tax credits" for education and health care where he might be able to push through only $100 billion in direct spending on the same, the tax credit gambit still looks attractive. Maybe that's not the tradeoff, but it's still worth understanding what Kerry is proposing, so progressives should debate both its efficacy as policy and its merits as a political strategy.

Maybe the next step will be to hire a social worker division for the IRS.

But don't mistake these problems with Kerry's economic policies with the idea that they are anything like Bush's policies. Progressives need to be vigilant in critiquing the limits to Kerry's fiscal programs, but don't miss the massive gains for education, child care and job creation contained in his "tax credit" rhetoric.

Nathan Newman is a labor lawyer and longtime community activist. Email See

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