Refundable Credits and Hidden Welfare Spending

Refundable Credits and Hidden Welfare Spending

The Congressional Budget Office takes a look a refundable tax credits in its latest report. These measures allow folks tax credits even if they have no liability -- in other words, the government just cuts them a check for a specific activity or purchase.

This chart shows how much the government has spent on such credits for anti-poverty purposes over the past few decades, as they gradually became more popular and then spiked as the recession as millions of Americans lost their jobs and incomes:

One interesting aspect of this graph is that the total amount of refundable tax credits quickly dipped down to about $150 billion in 2010. The chart indicates that this drop in spending was caused by the expiration of certain stimulus measures, including the Making Work Pay tax credit.

Of course, the Making Work Pay tax credit, which was designed to put money in the wallets of workers struggling through the downturn, didn't really go away -- it was immediately replaced by the payroll tax cut, which only expired last month in the resolution of the fiscal cliff. The payroll tax cut was roughly the equivalent of the Making Work Pay credit for the workers the Making Work Pay cut was intended to help. Because it was a reduction in the payroll tax rate rather than a refundable credit, however, the payroll tax cut doesn't show up on this chart. It cost the government roughly $120 billion a year, meaning that if it were included in this chart, there would be no post-stimulus dip in the dollar value of credits.

This is one example of how confusing and opaque the U.S. safety net can be.

Joseph Lawler is editor of RealClearPolicy. He can be reached by email or on twitter.

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