Deductions reduce the amount of income that is subject to tax. While credits are worth the same to taxpayers at all income levels as long as they have sufficient income to have a tax liability deductions are worth more to high-income taxpayers. The value of a deduction increases with the marginal rate of a taxpayer. A deduction is worth three times more to a family subject to the state s 6 percent tax rate than it is to a family at the 2 percent rate. To the extent the committee considers incentives, credits provide the same benefit to all taxpayers with sufficient incomes to claim the incentive.
Refundable credits provide assistance to families with incomes too low to claim traditional credits.
Moreover, gap between the time an expenditure is made and a credit is claimed and received may limit the effectiveness of credits as an incentive for low-income households. An incentive only works as an incentive if it encourages behavior that would not otherwise have occurred. Most of the research suggests that most tax credits have minimal, if any, influence on taxpayers behavior. In his recent confirmation hearing, US Treasury Secretary Paul O Neill testified that, As a businessman, I never made an investment decision based on the tax code. If higher electricity rates alone would encourage a taxpayer to buy energy-efficient appliances, there is no need for an incentive.