Skip to content

Does the Tax Compromise Raise Taxes on Low-Income Earners?

3 min readBy: Nick Kasprak

The compromise plan agreed to between President Obama and Senate Republicans extends all of the Bush taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts, and most of the cuts in the 2009 stimulus bill. Additionally, it includes a cut in the employee portion of the Social Security payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. from 6.2% to 4.2% of wages. David Kocieniewski of the New York Times (subscribe) wrote a story a few days ago that looked at how this compromise tax plan would affect a variety of taxpayers. He claimed that, under the compromise, “the only groups likely to face a tax increase are those near the bottom of the income scale — individuals who make less than $20,000 and families with earnings below $40,000.” As always, verifying the accuracy of a claim like this depends on the baseline you use – these groups see a tax increase compared to what?

The reason this claim is technically true is because, as explained in the article, the payroll tax cut is less generous to these groups than the Making Work Pay income tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. that it replaces. Making Work Pay was a refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). worth up to $400 ($800 for married filers) enacted in 2009 as part of the stimulus bill, and it is set to expire automatically at the end of 2010 along with all of the Bush tax cuts and the rest of the stimulus tax-cutting measures. However, it’s silly to use the credit as a baseline for comparison, since nobody, Democrats or Republicans, wants to extend it.

The tax bill that passed the House recently, the Middle Class Tax Relief Act of 2010, which extends the Bush tax cuts for income only under Obama’s famous $250,000 threshold, does not extend Making Work Pay. Neither does the Tax Hike Prevention Act of 2010, the original Republican proposal that extends all of the Bush tax cuts, but none of the stimulus bill tax cuts. Obama requested its extension in his budget proposal earlier this year, but the measure has been considered dead ever since Democrats left it out of their PAYGO rules, which list allowances for tax cuts that can be extended without needing to be paid for with spending cuts elsewhere. In short, nobody wants to extend Making Work Pay, and claiming that the compromise plan is a tax increase on low-income earners ignores the fact that it is still by far the most generous plan out there for them.

Furthermore, when Mr. Kocieniewski looks at other sample taxpayers, he uses full expiration of all tax cuts as his baseline for comparison. “A two-income couple earning $146,000 would owe about $7,000 less than if the tax cuts were allowed to expire,” he writes. This is true, but he’s comparing apples and oranges when he then later states that the compromise plan is a tax increase – this claim is true only if your baseline for comparison is extending current tax law into 2011, rather than the full expiration of all the tax cuts as used in the rest of the article.

The Huffington Post’s Jason Linkins linked to this story, portraying the compromise as a sell-out to wealthy taxpayers at the expense of the poor, sarcastically claiming “You’ll never guess whose taxes are going up because of the tax cut ‘compromise’ “. His post fits right in with a trend among liberal Democrats to portray the compromise plan as another betrayal by Obama of his base. Certainly, there’s an argument to be made for that – most Democrats would prefer to see the Bush tax cuts expire for high-income earners, which is what the bill recently passed by House Democrats does. But claiming that the new compromise plan raises taxes on low-income earners just doesn’t hold up to scrutiny. Since the House Democratic bill doesn’t include the payroll tax cut or an extension of Making Work Pay, the compromise proposal is by far the most generous plan for low-income people, and, compared with any reasonable baseline, constitutes a substantial tax cut for them.