As the New York Times noted this morning, most households will receive a tax cut under the proposed tax deal between President Obama and Congressional Republicans. In fact, “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.”
The reason that the working poor will be subjected to a tax increase is because Obama agreed to swap his Making Work Pay (MWP) tax credit (which was created as part of the 2009 Recovery Act) for a one-year, two-percentage point cut in the payroll tax. As the Tax Policy Center detailed, while low-income workers were able to reap the full benefit of Making Work Pay, they don’t earn enough to gain the same benefit from the payroll tax cut:
The MWP credit gave as much as $400 to each single worker and up to $800 to couples. If you’re single and earned at least $6,452 (and less than $75,000) in 2010, you got $400. Married couples with earnings over $12,903 (and less than $150,000) got $800.
But you won’t get $400 from the payroll tax cut until your earnings reach $20,000; earnings have to be twice that high to yield the $800 that MWP gave to couples. So single taxpayers who earn less than $20,000 and married couples earning less than $40,000 will pay more in taxes under the payroll tax cut than under MWP (see graph). Like everyone else, those folks will keep their Bush-era tax cuts and everything else that would continue from 2010 into 2011. But because no other provisions would cut their 2011 taxes relatively to 2010, those taxpayers are unequivocally worse off under the compromise in 2011 than under the tax law we have this year.
This translates into about $200 in higher taxes for an individual or $300 in higher taxes for a couple at the very low-end of the income scale. As the Tax Policy Center’s Bob Williams wrote, “the agreement turns on its head his repeated argument that we need to give more to the poor and ask more of the wealthy. No wonder Democrats in Congress are mad.”
Indeed, House Democrats are threatening to alter the tax package before voting on it, if they support it at all. If they do change the deal — in addition to trying to rectify placing a tax increase on the working poor while delivering a windfall to the rich — House Democrats might want to see if they can include a reauthorization of the TANF Emergency Fund, which helps create jobs for low-income workers and has won the praise of Republican governors like Gov. Haley Barbour (R-MS).