‘Tax cut’ vs. ‘tax rebate’

What exactly is the difference between a ‘tax cut’ and a ‘tax rebate’?  There are several very fundamental differences.

First, let us look at ‘taxes’

Taxes are the money we pay to our government.  This money is supposed to be used for something people need to get together for in order to achieve, such as ‘policing’ and ‘national defence’.  Other ‘common goods’, such as education, road construction, and so on,  are among the things we contract our governments to do.  Paying taxes is the way we ‘pool our pennies’ to do this. 

We pay taxes in many ways.  It can be through income taxes, where an employer has to take a part of a worker’s earnings and send it to the government – only the remnant goes to the worker.  Or, it can be through consumption taxes, where part of the price of each product or service is raised by some amount which is then paid (remitted) by the merchant or service provider to the government.  There is more, but – you get the picture.

The government has lots of wonderful, highly trained (and higly paid) civil servants who keep meticulous records of every penny that comes in:  whom it comes from and where it is going.  They also keep meticulous records making sure everybody has paid what they are supposed to.

Tax Cut

In a tax cut, the amount of money the government asks for is reduced.  Fewer pennies are coming into the government coffers, so more of them stay in your pocket – either because less of your wages gets sent to the government so that more can go to you, or because the price you pay for something is closer to its cost, since the price is less artificially raised by taxes. 

It also means that fewer pennies are entering the government coffers.  And (in an ideal world) fewer pennies coming in means fewer people who need to keep meticulous records of the pennies.  As in, fewer highly skilled, well paid professionals whose salaries are paid from all these pennies coming in.

Tax Rebate

A tax rebate works very differently.  The government is asking for the same amount of money to be sent into the government coffers, so the same amount of money is taken from a worker’s paycheque as before and sent to the government.  Buying ‘stuff’ is still expensive, because the price of everything still includes the same amount of of taxes – which are sent to the government coffers. 

The legions of highly trained (and highly paid) civil servants still keep meticulous track of all of this.  Then, at the end of the year, after the civil servants have done all the figuring out and balancing of things, they decide how much more you have paid than you should have.  So, they issue a cheque for this amount and send it to you. 

All this time, these pennies were in the government coffers, not in your pockets – so it was much harder to make the ends meet during the whole year….but now, you get a little bit back.

These are the ‘mechanics’, if you will, of the difference between a ‘tax cut’ and a ‘tax rebate’.  But there is another very important difference between these two – a difference I have not really heard people discussing. 

It is the difference in who is dominant in the government-taxpayer relationship.

When we pay taxes to our government, we are, in effect, contracting the government to act on our behalf in certain areas.  We, the taxpayers, are the boss.  Yes, the government has means to coerce us to pay, but the psychological and philosophical principle holds for how the relationship is set up.  The individual is the one who is employing the government, the individual is the empowering partner in the relationship.

When the government sends us rebates, it is the government who is the decisionmaker and the dominant partner in the relationship.  The taxpayer is reduced to the grateful recipient while the government is the power which decides who deserves to get money, and how much.

To make it easier to understand the relationship, let’s reduce the scale to the level of a family.  One partner works and earns a paycheque, the other looks after the household. 

If the earner controls the money, then the earner decides how much to hand over to the one who looks after the household and how much to keep.  The house-keeper may ask for extra when needed, but it is the earner who is in control.  If, on the other hand, the earner hands over the full paycheque to the house-keeper, and perhaps gets a little allowance for personal expenses, it is the house-keeper who is in control…  as in the first minute or so of the clip below:

To sum up, the idea behind a tax rebate in Oscar’s words:   ‘Holy hell!  The government has us on an allowance!’