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Tax Relief
Tax relief is a term used to describe cuts or incentives provided by the government to citizens paying income tax on their earnings. Tax relief can come in many forms. In 2008, for instance, the government implemented an “economic stimulus package,” where many Americans will receive (in addition to their annual tax refund,) funds that the government hopes will be spent or invested in ways that will ultimately stimulate the slowing economy. But this sort of case is a rarity, so don’t get too used to it.
The most common form of tax relief comes in the form of a tax cut. A tax cut essentially means that the government will collect less of the income generally earned by taxation, while citizens and business are allowed to retain income they would have otherwise spent paying the higher tax rate. Like the stimulus package, the hope (at least on the government’s part) is that placing more money in the hands of citizens and businesses will provide them incentive to go out and spend or invest their money, thereby stimulating the economy so much that, even at the lower tax rate, the government ultimately earns more in net tax revenue.
But while the phrase “tax cut” might seem great in and of itself, as most of us already know, cuts in taxation can come with some dubious fine print. Tax cuts don’t have to apply to every economic tier of the populace. President George W. Bush took office in 2000 proposing a $1.6 trillion tax cut—over half of which was aimed at lightening the “burden” on the wealthiest 1% of Americans. While that tax cut may be great for the rich-hoping-to-get-richer, the results for the rest of Americans has been anything but stimulating. Unemployment rates, and financial difficulties among American households are worse now than they’ve been in a long time. Virtually all the good promised to citizens by the Bush tax cuts have been solely enjoyed by the wealthy and big business, who, (thanks to this sort of “supply side economics,”) have enjoyed greater financial success than they have in years, if the oil industry is any stick to measure by.
However, the long-term effects of tax relief incentives are anything but predictable. No matter who is getting the break—be it the middle class, or the wealthy elite—there is no 100%, sure-fire way to predict how those saving money on taxes are going to spend it. If the government cuts tax rates, lowering its own annual income, the hope is that consumers and entrepreneurs will return the favor by investing in the country’s economy, thereby allowing the government to net more in other taxes (sales tax for example) over time, which they can then use to pay off the debt they incurred by lowering taxes. However, if people hold on to their extra money, or invest it in markets that don’t stimulate the domestic economy, (one reason why foreign markets and outsourcing have become such controversial topics,) then the government is left with debt they can’t repay, which can cause the pendulum to quickly swing in the opposing direction, with tax rates being raised, and the working-class citizen taking the financial hit.
In the end, tax relief (and the subtle nuances of taxation in general,) are a mixed bag, good or bad depending on the circumstances surrounding them, who the relief is aimed at, and what the long-term effects are going to be. It is important to understand, before you jump for joy having received what looks to be ‘free money,’ that there is a bigger picture to be seen, and from that understanding, finding the drive to manage your finances accordingly.
Topics: Taxes |
