I love thinking in terms of “The Most Harm to the Most People” – it introduces an “outside of the box” viewpoint for governmental and political decisions.
Consider a Tax Deduction: You earn money and deduct something against it – paying taxes on whatever is left. If you pay no taxes, a deduction has no effect.
Who pays no taxes? Those who don’t earn anything; those who don’t earn enough (reach an arbitrary minimum amount required to trigger tax responsibility); those who are deliberately avoiding taxes by “flying under the radar” and operating within an “underground economy”; those who are outright criminals. Keep in mind: Filing a false tax return, or failure to file, is a crime. Also, voluntary participation is the most efficient form of economic redistribution – either: willing participants ensuring the social welfare of their neighbors, or dominant classes finding a covert means to defraud their neighbors. When originally proposed, Social Security was intended to be an additional tax which (1) people would be happy to pay, and (2) they would never benefit from (get their money back from) – which is why the age was set to 65 at a time when half the world population was dead before they reached the age of 35.
In the matter of Deduction verse Credit, those who pay taxes at the HIGHEST rate gain the greatest benefit from a tax deduction – therefore we can expect the ruling elite to favor tax deductions, and that those deductions will comport with the usual expenses common to the elite. As the elite have fewer children, they would NOT favor increasing that deduction to reflect real costs. The elite buy expensive homes and subsidize them through mortgages on which the interest is deductible – a thirty-five percent tax rate reduces a ten percent mortgage rate to 6.5 percent (other taxpayers, the poor and middle-class, pay the difference through an effective increase in their taxes). If the elite can earn seven percent on the borrowed money (that is, the money they have invested which could have been used, without affecting their lifestyle, to pay cash for the home) they are actually earning a profit while enjoying their home. Most investors look for a return-on-investment which is three points ABOVE mortgage rates – they seek a return which includes compensation for the historic rate of inflation.
Looking at the example of a ten percent mortgage rate: The rate of return sought would be thirteen percent; they earn $13 on every hundred borrowed, deduct $10, which saves $3.5 (paying net $6.5 from earnings) and get an additional net of $2 from the inflation return adjustment. Thus, the true interest on the mortgage is 10-2-6.5 or $1.5. If the investment (stock value, etc) increases at inflation, it yields an unrealized, and compounded, gain of $3 per year – a real profit of $1.5 per year in the first year which is compounded every year thereafter for the life of the mortgage and then, when the mortgage is paid off, yields an INFLATION ADJUSTED mortgage interest amount as profit thereafter.
If you have no cash reserve to invest in place of using the funds for the outright purchase of your home, or your income is insufficient to require payment of taxes, a tax deduction serves no purpose – yields no economic benefit. With a graduated income tax, each deduction adds to a cumulative reduction of gross income and therefore has the effect of reducing both the applied tax rate and income to which it is applied. This introduces a quadratic equation effect into the analysis which escapes easy description – however, the effect is to increase the subsidy to rich along a bell curve at which the peak is the optimum level of compensatory investment. There is a point at which the benefits granted to the wealthy are counter productive – top down stimulation does not work to generate economic growth, when the wealthy are already at, or have retraced over, the optimal point.
On the other hand, refundable tax credits work from the bottom up. They subsidize the poor, while yielding an equal dollar-for-dollar benefit to the wealthy. Universal Healthcare is a form of credit which only hurts the private insurance companies who benefit from the same demographic effects which motivated the Kaiser to introduce the original Social Security – all insurance is something the majority are not intended to benefit from. Note that the wealthy oppose Universal Healthcare – the cost of private care is the same for rich & poor therefore the poor pay more of their real income for it ... it is, like tax deductions, regressive – benefitting the rich while increasing the cost to the poor.
NOTE: You will not see this in the media. At best, there is a passing reference to it. The members of the mainstream media are in the income brackets which benefit from regressive programs and therefore will not play their proper role of informing the masses of the realities of a situation. In fact, they will often find secondary excuses to oppose any politician who speaks for credits. If not for the leverage (borrowing to invest) aspect in the above mortgage example, insurance companies would promote refundable credits for Healthcare and other insurance payments – this would open their customer base. However, in terms of most non-age based insurance, the poorer the person the more likely it is that they would require payments and therefore reduce insurer profits.
Tax CREDIT – especially refundable ones – are the most socially responsible approach to taxation. The framers of the constitution determined that those who could afford property should pay taxes – all others should be exempt. They also determined the tax rate should be fixed and therefore progressive in the amount paid – based upon the voluntary choice of the wealthy to acquire additional taxable property. We have a system which pays the wealthy to increase their income – by increasing the burden on the less wealthy. This is the essence of “The Most Harm to the Most People” – the elite few benefit by inflicting hardship on a less fortunate majority.
Those who care about their neighbors; those who honor the Golden Rule; those who will do for others as they would hope others would do for them, if roles were reversed, favor refundable credits and oppose deductions. The side benefit of this is to make it more costly to partake in criminal activity or an underground economy – because any attempt to collect the credit would expose the filer to an audit, and provide law enforcement with an additional tool in the war on drugs or other criminal activity (through granting access via another enforcement agency).