Obama's signature tax cut for middle class -- titled Making Work Pay -- expires at the end of this year. Republicans show no interest in renewing it. As a result, working-class and middle-class earners will pay a bit more in taxes in 2011, even if the Bush-era tax cuts are left in place.
This was the Rodney Dangerfield tax cut -- it got no respect. Voters didn't remember it. Republicans want to endorse Bush's tax cuts, not anything that Obama did.
Extending Make Work Pay would cost $600 billion over 10 years. That's a big ticket, but less than the $700 billion it costs to extend tax cuts for the rich. No matter. When the rich get richer, it's better for American workers -- just ask Kentucky Senator-elect Rand Paul.
Making Work Pay was passed as part of the stimulus bill in 2009. It provides a tax credit of up to $400 for single people and $800 for married couples filing jointly. Singles get the full credit on earnings up to $75,000 and couples, up to $150,000. On higher earnings, the credit gradually phases out. The credit was hard to notice because you didn't get a single large check in the mail, as you did with the rebates backed by Bush in 2008. That was a deliberate choice. Of the rebates, only an estimated 20 percent was spent on goods and services. The rest was saved or used to pay down debt. Those are two smart uses of a windfall check, but they didn't do much to slow the plunge into recession.
Obama's tax cut was designed to put all the money into the economy. The IRS reduced the amount withheld from your paycheck. You received your tax credit in the form of an extra $15 or $30 in your paycheck every two weeks, or lower estimated tax payments every quarter. That trickle of steady money was spent.
At the end of December, that trickle dries up. The working middle class will pay an extra $400 or $800 in 2011, in the form of more money withheld from their paychecks. Their targeted tax credit isn't on the Republicans' must-save list. What is on the list are the Bush-era tax cuts that yield more for the well-to-do. Obama wants to extend the cuts only for singles earning up to $200,000 and married couples up to $250,000, who, together, make up 97 percent of the population. Rates for the top 3 percent would rise -- not quite to the pre-Bush levels, but close.
Since the election, the odds of passing such a law have plunged. High-income people will probably keep their tax cuts, too. The only question appears to be whether the cuts will be temporary or permanent. Any temporary tax cuts, passed now, will last for at least two years, to get the political actors past the presidential election year of 2012. Whether they rise in 2013 will depend on who's in the White House and what the Congress looks like.
It's still possible that the Democrats and Republicans won't agree on a tax bill before the end of the year. The Republicans might think it better to wait until January, when they're in charge of the House. In that case, what would happen to your tax withholding? Probably nothing. In theory, withholding should rise -- and your paychecks shrink -- because the pre-Bush tax law would be back in effect. But Treasury Secretary Tim Geithner can do whatever he wants with the withholding tables. Given the fragile economy, it would be crazy to raise rates when it's clear that the Bush cuts will be extended for at least for 97 percent of us. Odds are, the tables would stay the same -- certainly for the middle class and maybe for high-earners, too.
Geithner has until early to mid-December to decide. The Treasury figures that companies with automated payroll systems need about two weeks to put any changes in place.
There remains the little matter of the federal deficit. Extending the cuts to 97 percent of us costs $3 trillion over the next 10 years, according to the Tax Policy Center. Extending cuts to the wealthy, too, would cost $3.7 trillion. Neither approach is paid for, and there's no politically acceptable way of chopping that much money out of the current budget.
As an example of the difficulty, take health care reform, which reduces the growth in future Medicare spending by $500 million. The cost cuts come mostly out of payments to providers. No Medicare benefits were reduced. Nevertheless, the seniors screamed. On the hustings, Republicans implied that the cuts would be reversed.
In truth, conservatives have Social Security and Medicare in their gun sights. Tea Party favorite Minnesota Rep. Michelle Bachman, who is running for a leadership position in the next Congress, wants to keep Social Security and Medicare only for people who currently have it and wean off everyone else. Wisconsin Rep. Paul Ryan's road map to budget balance privatizes both programs over time. The report of the president's deficit commission, due December 1, is expected to take a whack at Social Security, too ("a milk cow with 310 million [teats]" was what commission chair and former Senator Alan Simpson called the program).
As they all tell the tale, U.S. deficits arise mainly from programs that help the elderly.
But think back a mere 10 years . The federal budget was in surplus. More money was coming into the Treasury than going out, despite the spending on the big entitlement programs. Tax rates were at historic lows. What has happened since then, to drive the deficit up? The Bush tax cuts, to even deeper lows. Two wars (not paid for). Medicare Part D (not paid for). And then the Great Recession. Social Security and most of Medicare can plead innocent.
Deficits can be reduced, and the country can run, without taking a wrecking ball to the social programs that provide financial security to the older middle class. But voters have to want to. In 2010, they voted for the party opposed.
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