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CHAPTER 12 TAX CREDITS AND PAYMENTS LECTURE NOTES TAX POLICY CONSIDERATIONS 1. Tax Credits as a Tax Policy Tool . Over the years, Congress has used tax credits extensively to encourage desirable activities including the conservation of energy (e.g., the energy tax credit), the rehabilitation of industrial and commercial buildings and certified historic structures (e.g., the tax credit for rehabilitation expenditures), and the provision of equity for selected taxpayer groups (e.g., the foreign tax credit, the earned income credit). See Examples 1 through 3 in the text. ADDITIONAL LECTURE RESOURCE Benefits from Tax Credits . Tax credits have been used frequently in the U.S. over the past four decades as part of the income tax system. Often Congress has enacted various tax credit measures solely under the presumption or belief that the measures will be effective in fulfilling the perceived or stated purpose. While many scholarly and empirical research projects have been conducted to measure the effectiveness of various credits, there still is some uncertainty as to whether the benefits of such provisions exceed their costs. a. For many years, Congress has used the tax credit provisions of the Code liberally in implementing tax policy. b. The use of tax credits as a tax policy tool continues to evolve as economic and political circumstances change. This is evidenced by the continuing importance of several old credits (e.g., earned income credit) and by the recent enactment of several other credits (e.g., credit for certain retirement plan contributions). In addition, the adoption expenses credit for a child with special needs was made permanent by recent tax legislation. ADDITIONAL LECTURE RESOURCE 12-1
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12-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes What Behavior Should Tax Credits Invoke ? Many of the tax credits enacted by Congress are intended to influence taxpayer behavior. For example, the work opportunity tax credit is designed to encourage the employment of individuals who historically have difficulty finding jobs. Similarly, the availability of various energy credits is supposed to encourage taxpayers to develop and use alternative energy sources. These credits have been part of our tax law for many years and are generally recognized as pursuing worthy tax policy goals. However, other credits, or proposed credits, are frequently criticized for too narrowly targeting particular groups of taxpayers. For example, one tax credit proposed several years ago by Representative Patrick J. Kennedy of Rhode Island was designed to encourage the construction of luxury yachts in the United States. The idea was to boost the U.S. boatbuilding industry by stimulating demand and, as a result, keep skilled workers gainfully employed. This proposal, which was referred to congressional committees, would allow a personal tax credit of up to $2 million for the purchase of a new U.S.-made luxury yacht. Congress has yet to see the wisdom of enacting this proposal.
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