White House Releases New Tax Calculator
April 5, 2011
The Obama administration posted a new “Tax Cut Calculator” on its website today, with the goal of informing taxpayers how last year’s December tax compromise is affecting their 2011 taxes. No doubt they were inspired by the Tax Foundation’s online calculator showing exactly that, which we posted in July of last year and kept continually updated right up until the President signed the compromise plan.
So is it accurate? That depends. The Obama calculator looks at four specific pieces of the compromise – the 2% cut in the employee portion of the Social Security payroll tax, the child tax credit, the earned income tax credit, and the American Opportunity Tax Credit for college tuition. Nothing the calculator tells you is false, but there’s plenty of helpful context being left out.
A big issue is that everything (with the exception of the payroll tax cut) is quoted as an “Up To” figure – you could receive a child credit worth “up to $1,000 per child,” or an American Opportunity credit worth “up to $2,500” per student per year of college. The EITC figures, as well, are the maximum possible credit based on the number of children you’ve entered. There’s always a trade-off between accuracy and simplicity inherent in calculators like these, and certainly, with partially refundable credits like the child credit and the American Opportunity credit (whose final values depend not only on your income but also on the amount of tax you owe), a detailed calculation is beyond the scope of this kind of calculator. But that excuse doesn’t apply to the EITC, which is fully refundable and, for the most part, depends solely on your earned income and your number of children (both of which the calculator already asks you about.) If I tell the calculator that I’m married with three kids and make $45,000, and it tells me I could receive an EITC worth “up to $5,751,” it’s misleading me, because it knows everything it needs to tell me that I’d actually only get an EITC worth $842.
The other main problem is that the child tax credit, EITC, and American Opportunity credit are all pre-existing programs that were expanded by the ’01 and ’03 Bush-era tax cuts, and later by the ’09 stimulus act – the compromise bill essentially preserves expansions to these programs that have been enacted over the past decade. Even if you do get an EITC payment of $5,751 (as the calculator suggests) that’s not all a result of the tax compromise – if it hadn’t passed and all the tax cuts expired, you’d still get an EITC of $5,112. So the compromise is giving you at most $639. Regarding the child credit, it was worth $500 per child before the Bush tax cuts, which expanded it to $1,000; the ’09 stimulus bill increased the degree that the credit was refundable. Finally, the American Opportunity is simply an expansion of the Hope Credit with a new name. In all of these cases, the calculator is overstating the benefits of the compromise because it doesn’t compare its numbers to any kind of identifiable baseline (such as a failure to pass a compromise resulting in the expiration of all Bush-era and stimulus tax cuts.)
A similar criticism applies to the payroll tax cut – while it’s technically an entirely new thing, it replaces what is known as the “Making Work Pay” credit – a refundable tax credit worth up to $800 enacted in the 2009 stimulus bill, and now expired. A truly honest assessment of the payroll tax cut would compare its benefits to the Making Work Pay credit. It is (for most people) more generous, but, in light of what it replaces, it’s not quite as generous as the calculator claims.
While I am no longer actively updating our own tax calculator, it’s still perfectly valid for 2011 and can give its users a far more detailed and accurate assessment of the effects of the December tax compromise.