Tax Deal Would Raise Taxes On 25 Million Low-Income People, But Congress Can Easily Fix The Problem

Yesterday, I highlighted this report from the Tax Policy Center showing that if the tax deal negotiated between President Obama and Congressional Republicans is approved, low-income households will actually see their taxes go up. Due to the deal’s provision swapping Obama’s Making Work Pay (MWP) tax credit for a straight payroll tax cut, those working people who don’t earn enough in wages to see their payroll taxes cut by the value of the MWP credit will ultimately be subjected to a tax increase.

That bit of tax wonkery translates into 25 million low-income Americans seeing their taxes go up next year under the tax deal, even as a millionaire receives a $139,000 tax break (and the heirs of dead multi-millionaires receive another break courtesy of an estate tax cut). This is simply unacceptable, and as CAP’s Michael Linden wrote today, is very simple to fix:

The good news is that fixing this problem is easy and, compared to the cost of the entire package, pretty cheap. The best solution would be to implement a “stop-gap” credit that makes up the difference between their payroll tax cut and the value of the Making Work Pay credit. This would actually be easier and simpler than the current Making Work Pay structure, and it would hold harmless all 25 million people. This fix would cost less than $7 billion — less than one-tenth the cost of extending the bonus Bush tax cuts for the rich, and less than the cost of cutting the estate tax.

Republicans have emphasized for months and months that no American should see a tax increase next year, a point which they hammered so hard that they finally won from Obama a full extension of the Bush tax cut and a totally unjustified cut in the estate tax. To win those concessions while raising taxes on 25 million people at the low-end of the income scale would be an abomination.


At the same time, the tax deal also rips away the benefit of Making Work Pay from public employees, as they pay into pension systems other than Social Security (and thus don’t pay the payroll tax). These are real problems, and as House Democrats look to redefine what is and is not in the tax deal, they are problems that need to be fixed.