Athough President Obama’s persistent contention that extending the Bush cuts would be “irresponsible” and only help the rich, a new Tax Foundation analysis released Oct. 7 finds that low-income workers would have a financial setback. Ironically, the meager-income folks he would hurt are a big part of Obama’s voter base. The Bush tax reductions will expire at the end of 2010, unless Congress extends them.
In a town-hall discussion in Washington Sept. 20 on CNBC television, Obama claimed: “Our tax rates are lower now than they were under Ronald Reagan. The federal government is probably less intrusive now than it was 30 years ago,” he fantasized.
If the tax relief isn’t extended, most of the old higher taxes will kick in. Sunset provisions were included for both the 2001 and 2003 tax laws. While Obama has convinced much of the public that the Bush tax cuts were mainly for the wealthy, “taxpayers across the entire income spectrum received a significant tax cut,” the Tax Foundation analysis noted. Moreover, the earned income tax credit (EITC) for the working poor, originally enacted as an anti-poverty measure, will be affected, too, if the tax provisions in the stimulus package of 2009 are allowed to expire.
If one compares changes in after-tax income, it shows that the benefit of the tax cuts were distributed much more equally along the income scale, because the Bush tax cuts included many provisions targeted specifically at low-income people. Folks with low incomes benefited from some stimulus measures enacted in 2009. They also are scheduled to expire at year’s end, namely, by the expansion of the earned income tax credit, as well as larger credits for college education. Various tax proposals made by members of both political parties extend most of these low-income tax provisions. But, as the Tax Foundation study points out, “the current Congress has shown itself to be unusually susceptible to gridlock. No vote will occur before the midterm elections. And although both parties have indicated the tax matter will be addressed in a lame-duck session after the Nov. 2 elections, there’s no certainty of legislative agreement then either.”
Because the threat of entire expiration of the tax cuts is quite possible, it is important to consider what effect it would have on low-income taxpayers. Take the EITC. It’s a sizeable gift for the working poor. Workers with wages within a certain range and very limited investment income are eligible. The credit is refundable, meaning that workers who have no income tax liability get the credit in the form of a check. When a worker reaches an income level at which the credit is considered unnecessary, the credit starts to decline. Before the Bush tax cuts, the credit amounts were the same for both single people and married couples. This was a component of the so-called marriage penalty. If two single EITC recipients –maybe living together—got married, their combined income often would make them ineligible for the EITC. The Bush tax cut changed this by increasing the income threshold at which the credit starts to phase out for married filers.
The 2009 stimulus law added a new more generous EITC category for tax filers claiming three or more dependent children.
The present Republican proposal is to extend all the Bush tax cuts without any stimulus law provisions. Democrats in Congress would extend both the Bush EITC and some stimulus provisions, too.
Before the Bush tax cuts, most taxpayers could get a $500 tax credit for each dependent child. The Bush cuts doubled the credit to $1,000 per child. This benefits low- and middle-income families because it phases out when income reaches certain levels ($110,000) for couples, for example. The broadest tax-cutting provision in the stimulus law was a new refundable tax credit called the making-work-pay credit, equal to 6.2 percent of a taxpayer’s wage income up to $800 for joint returns. It phases out as income climbs above $75,000, or $150,000 for joint returns. So, that’s another provision benefiting low- and middle-income people. This credit is due to die at the end of this year.
As for education credits, low-income taxpayers are better off claiming an education credit rather than deducting expenses. Education credits phase out with rising income. The Hope education credit was worth up to $1,800 per student, dependent on tuition expenses. The 2009 stimulus bill replaced the Hope credit with a new American Opportunity credit, with a higher phase-out threshold. Obama’s budget calls for extending that credit into 2011. (Tax calculations were based on the Tax Foundation’s projected 2011 tax bracket levels, which are figured by IRS.)
Probably the most important single tax provision in the Bush cuts–for low-income people–was a new low tax rate on the first $6,000 in income ($8,500 in 2011 dollars). Before the Bush tax cuts, taxable income up to $27,950 fell into the 15 percent tax bracket. The Bush cuts split this in two, setting a tax rate of 10 percent on the lowest bracket. That change had the largest impact on the low-income taxpayers from a percentage standpoint. Before the Bush tax cuts, the standard deduction (which many people take who don’t itemize deductions–for charitable gifts, state taxes, for instance) for married couples was less than twice the standard deduction for singles. This was another aspect of the “marriage penalty” So, the Bush tax laws made the standard deduction for married joint returns twice the deduction for single returns.
If the Bush tax cuts expire on December 31, for a family of four with $40,000 income, taxes would rise an average of $1,130. If the tax cuts are extended, taxes for that family would shrink by $1,513. A single parent with two children making $20,000 and getting EITC would have after-tax income of $24,415 if the Bush cuts died. But the $20,000-income family would have $25,495—more than $1,000 more in their pockets–if the Bush tax cuts stayed alive. Definite dollar pluses for low-income families.
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