Why Nobody Noticed Obama’s Tax Cuts

By :: October 21st, 2010

Michael Cooper over at The New York Times stopped off at the Pig Pickin and Politickin rally in North Carolina the other day to ask folks about the Obama tax cuts. Their response, not surprisingly, was “What Obama tax cuts?”
This despite the fact that about one-third of the much-reviled 2009 stimulus—or almost $300 billion--came in the form of tax reductions. According to Tax Policy Center estimates, 96.9 percent of households enjoyed a tax cut that averaged almost $1,200. Just one measure—Obama’s Making Work Pay tax credit—put more than $116 billion into people’s pockets in 2009 and 2010.
Yet, a Times poll found that fewer than 10 percent of those surveyed had any clue. Remarkably, fully one-third thought their taxes went up—even though the actual number was about zero.
How could so many people have missed it? After all, $1,200 ain’t nothing. In large part, it was due to the design of Obama’s tax plan. Earlier stimulus tax cuts often came in the form of ostentatious checks from the Treasury. In 2008, for example, President Bush proposed a tax reduction only half the size of Obama’s (about $145 billion). But it was delivered to households in the form of rebate checks—generally $600 per adult and $300 per child.
However, conventional economic wisdom argues that increased withholding over time is more effective stimulus than a single big check. The theory is that people will bank a one-time rebate but spend the extra bucks they get in their weekly pay.
Obama listened to the economists. His signature Making Work Pay credit was built into the withholding tables. Other stimulus tax cuts, such as his expansion of the Earned Income Credit, didn’t show up for most recipients until they filed their tax returns last spring.
Did the Obama strategy succeed economically? Did nearly $300 billion in tax cuts boost demand at a time when the economy desperately needed a jump start?
The Administration thinks it did. But University of Michigan tax professor Joel Slemrod, who has studied the economic response to tax stimulus, isn’t so sure. About a quarter of those who responded to a Michigan survey in 2008 predicted they’d spend the Bush rebate, but Joel found that only about 13 percent said they’d boost spending in response to the Obama stimulus. Of course, what people say they are going to do and what they really do are sometimes not the same. The truth is, we’ll never really know what they did with the money.
We do know that most Americans never noticed the extra bucks. One reason: About one-quarter of the stimulus tax cut was devoted to extending the Alternative Minimum Tax patch. This protected about 25 million middle-class households from that hidden tax, but you can’t expect people to respond to a law that exempts them from a tax they never knew they owed.
There are some other interesting theories about why the tax cut went unnoticed: Perhaps it was due to state and local tax increases that occurred at the same time. Or because rising health insurance premiums ate up that extra after-tax pay. Of course, it may also have been the result of unrelenting GOP criticism of Obama’s phantom tax hikes. If you are told every day that your taxes went up, I suppose you might believe it, reality to the contrary.
Finally, I wonder how many people even know what their take-home pay is anymore. At least two-thirds of workers are paid through direct deposit and even if we get a pay stub, there is a good chance it will gather dust, unopened, in a pile on our desk. In that environment, do Americans notice if their after-tax income has changed, and why?
Congressional Democrats may be about to pay a fearsome price for Obama’s decision to follow economic conventional wisdom. I’ll leave it to future historians to tell us whether the great unseen tax cut was an exercise in economic courage, dumb politics, or both.

12Comments

  1. Anonymous  ::  8:43 pm on October 21st, 2010:

    Bush I did stimulus the same way by playing with the tax tables. It did not really stimulate the economy (since Bush merely changed withholding but not the tax obligation) and he didn't get credit for it.
    A bigger refundable cut, targeted to families with children, would have had a bigger bite.

  2. Anonymous  ::  9:46 pm on October 21st, 2010:

    >Congressional Democrats may be about to pay a fearsome price for Obama’s decision to follow economic conventional wisdom.
    Your hypothesis is that a more evident tax rebate would have prevented next month's electoral blowout? Seriously? After Obama and the Democrats spent over a year on an ideological crusade for health care rather than on promoting economic growth through increased political stability?
    For the real explanation, I refer you to the hilarious http://pajamasmedia.com/blog/republicans-kind-of-suck-which-is-why-they-will-win-huge-in-november/?singlepage=true

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  4. Anonymous  ::  6:03 pm on October 22nd, 2010:

    What was REALLY galling was that they quietly reduced our withholding even though we didn't qualify for the tax cut, then they fined us for not withholding enough!

  5. Anonymous  ::  8:29 pm on October 22nd, 2010:

    The problem was that they withheld the married rate from both spouses. If people were overwithheld, that was not a problem – however for people who were close to the line or a bit under, the penalty will be costly if paid back slowly.

  6. Anonymous  ::  8:56 pm on October 22nd, 2010:

    The withholding situation was a little more complicated than Michael suggests. First, as Michael says, withholding was reduced by more than $400 for each spouse if both worked–up to $600 each. If each spouse earns more than about $10,000, the couple's withholding would drop $1,200 while their tax bill would fall by only $800.
    But it's worse if the couple's income is high enough that the credit is phased out. The credit phases out at a 2% rate for income over $150,000, so a couple with income over $190,000 gets nothing. If each spouse earns $100,000, each would see withholding fall by $600–a total of $1,200–while the couple could not claim any credit on their tax return because of the phaseout. The problem goes away if each spouse earns enough that withholding wasn't changed, but that required that each earn more than $180,000. Note that a one-earner couple could be in the reverse situation: withholding could fall by no more than $600 while they could qualify for a credit of $800.
    The logic of cutting withholding by up to $600 for each spouse was to split the difference between one-earner and two-earner couples. The first would see withholding fall too little while the second could see withholding fall by too much. And that tradeoff was designed to avoid complicating the withholding change.

  7. Anonymous  ::  11:51 pm on October 22nd, 2010:

    Excellent explanation, Bob. That's one more reason to hate phase-outs. Not only are they sneaky but they make government benefits harder to administer. Give me an honest 40% rate rather than 25% plus 15% of sucker punches. Please.

  8. Anonymous  ::  6:58 pm on October 25th, 2010:

    I could not agree more with you AMTbuff…This blog has shared something for everyone to understand the TAX

  9. Anonymous  ::  9:44 pm on October 26th, 2010:

    How much of this tax cut reduced people's tax obligation? How much of this “tax cut” was in the form of checks to people in an amount above and beyond any taxes they owed? How much of it was in the form of checks to people who pay no taxes whatsoever?

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  11. Anonymous  ::  12:13 pm on November 3rd, 2010:

    The Making Work Pay tax credit began in April of 2009 putting about $30 more a month into workers paycheck. If you look at the charts for Personal Consumption, GDP, and the Leading Economic Indicators, as well as After Tax Corporate Profits, they all began to rise on about April of 2009. In fact, we now know that corporate profits grew faster during the last 18-month period than at any time since the 1920's. Did the bottom-up, demand-side, consumer tax cut work? I don't think it was a coincidence.

  12. OldManDave  ::  2:12 pm on February 19th, 2012:

    COULDN’T AGREE MORE… i WORK A COUPLE OF PART TIME JOBS THAT DIDN’T PAY A WHOLE LOT BUT STILL GOT FINED FOR LESS WITHHOLDING…!