Surprise! You got a tax cut! (You just didn't notice.)
Many Americans got a tax cut last year, but most didn't notice the decreased payroll deductions. It might be good economics, but it's bad politics.
Michael Cooper over at The New York Times stopped off at the Pig Pickin and Politickin rally in North Carolina the other day to ask folks about the Obama tax cuts. Their response, not surprisingly, was “What Obama tax cuts?”
This despite the fact that about one-third of the much-reviled 2009 stimulus—or almost $300 billion--came in the form of tax reductions. According to Tax Policy Center estimates, 96.9 percent of households enjoyed a tax cut that averaged almost $1,200. Just one measure—Obama’s Making Work Pay tax credit—put more than $116 billion into people’s pockets in 2009 and 2010.
Yet, a Times poll found that fewer than 10 percent of those surveyed had any clue. Remarkably, fully one-third thought their taxes went up—even though the actual number was about zero.
How could so many people have missed it? After all, $1,200 ain’t nothing. In large part, it was due to the design of Obama’s tax plan. Earlier stimulus tax cuts often came in the form of ostentatious checks from the Treasury. In 2008, for example, President Bush proposed a tax reduction only half the size of Obama’s (about $145 billion). But it was delivered to households in the form of rebate checks—generally $600 per adult and $300 per child.
However, conventional economic wisdom argues that increased withholding over time is more effective stimulus than a single big check. The theory is that people will bank a one-time rebate but spend the extra bucks they get in their weekly pay.
Obama listened to the economists. His signature Making Work Pay credit was built into the withholding tables. Other stimulus tax cuts, such as his expansion of the Earned Income Credit, didn’t show up for most recipients until they filed their tax returns last spring.
Did the Obama strategy succeed economically? Did nearly $300 billion in tax cuts boost demand at a time when the economy desperately needed a jump start?
The Administration thinks it did. But University of Michigan tax professor Joel Slemrod, who has studied the economic response to tax stimulus, isn’t so sure. About a quarter of those who responded to a Michigan survey in 2008 predicted they’d spend the Bush rebate, but Joel found that only about 13 percent said they’d boost spending in response to the Obama stimulus. Of course, what people say they are going to do and what they really do are sometimes not the same. The truth is, we’ll never really know what they did with the money.
We do know that most Americans never noticed the extra bucks. One reason: About one-quarter of the stimulus tax cut was devoted to extending the Alternative Minimum Tax patch. This protected about 30 million middle-class households from that hidden tax, but you can’t expect people to respond to a law that exempts them from a tax they never knew they owed.
There are some other interesting theories about why the tax cut went unnoticed: Perhaps it was due to state and local tax increases that occurred at the same time. Or because rising health insurance premiums ate up that extra after-tax pay. Of course, it may also have been the result of unrelenting GOP criticism of Obama’s phantom tax hikes. If you are told every day that your taxes went up, I suppose you might believe it, reality to the contrary.
Finally, I wonder how many people even know what their take-home pay is anymore. At least two-thirds of workers are paid through direct deposit and even if we get a pay stub, there is a good chance it will gather dust, unopened, in a pile on our desk. In that environment, do Americans notice if their after-tax income has changed, and why?
Congressional Democrats may be about to pay a fearsome price for Obama’s decision to follow economic conventional wisdom. I’ll leave it to future historians to tell us whether the great unseen tax cut was an exercise in economic courage, dumb politics, or both.
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