The tax increase no one’s talking about
Tax cuts for the wealthiest few have gridlocked Congress, but the expiration of Obama's Making Work Pay and other earned income credits will increase taxes on 95 percent of Americans.
Congress and the administration have been arguing for months over extension of the Bush tax cuts: Should we extend them for everyone or only for the poorest 98.3 percent of Americans (which would also maintain some tax cuts for the rich)? Disagreement revolves around roughly $68 billion: the cost of covering the last 1.7 percent vs. the government pulling that much money out of the private sector and squelching economic recovery. But nobody’s talking about the nearly $80 billion hit that expiration of the 2009 stimulus bill will inflict.
The stimulus bill (the American Recovery and Reinvestment Tax Act of 2009) provided $287 billion in tax cuts for 2009 and 2010 but most provisions expire at the end of this year. (Congress extended some of the business tax cuts during the summer.) The big kahuna is the Making Work Pay credit—nearly $60 billion a year going to most workers—but partial exemption of unemployment compensation, expansion of EITC and education credits, and greater refundability of the child credit deliver nearly $20 billion more. Taxes will jump for more than 95 percent of Americans when those cuts evaporate come January.
Why does a $68 billion tax increase on wealthy taxpayers throw Congress into total gridlock but no one mentions a tax hike almost 20 percent bigger? Partly it’s that the stimulus was designed as temporary; Congress may have made the Bush tax cuts temporary to avoid a filibuster but proponents always meant them to last forever. However, it’s also a triumph of politics over economics: stimulus is a dirty word in Washington these days, even though most economists agree that the economy still needs a strong boost. And maybe “economist” is a dirty word too.
Arguably taking $80 billion away from all but the richest Americans would hurt spending more than pulling $68 billion out of fat wallets. Low- and moderate-income households save less of their income than do wealthier people, so raising their taxes causes a bigger drop in consumer demand.
Deficit hawks worried about running up more red ink should oppose extending either set of tax cuts. But people worried about what a tax rise will do to the economy should quit fretting about higher taxes on the rich and focus on the other 98 percent of Americans.
The Tax Policy Center is a joint venture of the Urban Institute and Brookings Institution. The Center is made up of nationally recognized experts in tax, budget, and social policy who have served at the highest levels of government. TaxVox is the Tax Policy Center's tax and budget policy blog.
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