Transcripts

The Role of the Refundable Tax Credit

PAUL KANGAS: This is the time of year when many Americans are spending their weekends scrounging for receipts, getting ready to file their tax returns. When an estimated 40 percent of the taxpayers are done, they'll find they owe no Federal income tax. As we continue our look at the economic choices facing voters this year, Darren Gersh looks at why the major presidential candidates are pushing to give those people a tax break.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: When presidential candidates want to help low- and moderate-income families, their campaigns are increasingly turning to refundable tax credits. Unlike say, a deduction for college expenses -- which reduces a family's income tax bill -- a refundable credit can be refunded to a family that owes little or no income tax. Meaning, those who qualify can get a check from the government. Law Professor Lily Batchelder says it's a good idea. LILY BATCHELDER, ASSOCIATE PROFESSOR, NYU LAW SCHOOL: If you don't make something a refundable tax credit, meaning you can get it if you have no income tax liability, then you're missing basically the bottom half of the income distribution of families with children, which seems to me exactly the portion of the population you don't want to miss, because they are least likely to be able to send their children to college.

GERSH: John McCain, Barack Obama and Hillary Clinton are all campaigning for generous refundable tax credits. The biggest refundable tax credits would be for health insurance. McCain offers up to $5,000 to help families buy coverage. It's his campaign's only refundable tax credit. Senators Obama and Clinton haven't put a precise figure on the size of their refundable health insurance credits, but their campaigns have made it clear they would be extensive. On education, Clinton and Obama are more precise. Obama offers a college tuition tax credit of up to $4,000; $3,500 for Clinton. Both Democrats back refundable tax credits for working families, child care and retirement savings. Senator Obama is the only candidate offering a $500 refundable tax credit for mortgage interest. At the Center for Tax Policy, Len Burman worries all these new credits will make the tax code even harder to understand, further eroding trust in the system.

LEONARD BURMAN, CO-DIRECTOR, TAX POLICY CENTER: People get the sense that other people are getting more goodies from the tax code than they are and they have the feeling that the tax system is unfair. And since our whole system is based on the notion of voluntary compliance, it is important for people to perceive it as being fair.

GERSH: Budget hawks like the Cato Institute's Chris Edwards consider refundable tax credits just another way to get the government to write checks to people.

CHRIS EDWARDS, ECONOMIST, CATO INSTITUTE: Refundable tax credits are really just new spending programs. But people like to -- politicians like to call them tax credits because it sounds like they are less liberal or less sort of big government if you call a spending program a tax credit.

GERSH: While John McCain has proposed a refundable tax credit, Democrats are much more aggressive, using the tax code as a policy tool to ease the financial burdens on working class families. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.