Should Working Class Families Pay Higher Tax so High Income People Can Pay Less?

By :: December 20th, 2012

Somehow, the fiscal cliff tax debate has taken a truly weird turn. No, not the politics, which long ago became a parody of Washington deal-making at its worst. It is the policy that has gotten strange: Democrats and Republicans seem hell-bent on protecting millions of high-income people from deficit-cutting tax hikes.

President Obama started all this four years ago when he redefined the middle class as individuals making $200,000 or less and couples making up to $250,000, and vowing they would never, ever pay a penny more in taxes. This promise exempts 98 percent of households from paying higher taxes to reduce the deficit—a goal most of them say they support.

But that was just the start. Earlier this week, pressured by House Speaker John Boehner, Obama reportedly agreed to define the protected middle class as those making as much as $400,000, and the gossip around town is that he might even up the bidding to $500,000.  All this seems to be headed in exactly the wrong direction.

For his part, the speaker has taken an even stranger turn by going rogue with his Plan B. He’d raise taxes on those making $1 million or more, who account for only about 0.2 percent of households. And he’d raise taxes on those making $50,000 or less. The result: Working families would help cover some of the revenue that’s lost from protecting those making between $200,000 and $1 million.

Indeed, under the speaker’s plan, according to a new Tax Policy Center analysis, almost no one making between $200,000 and $1 million would pay more in tax than what they’d pay under today’s rules.  

But those at the low end would not be so fortunate. About 22 percent of households making $20,000 to $30,000 would pay more than under today’s rules (the current policy baseline in budget-speak), while none would pay less. On average, those households that do pay more would owe an additional $1,000. Those making $10,000 to $20,000 would see their after-tax income fall by almost 2 percent under Plan B.

Several elements of Boehner’s bill would raise taxes for low- and moderate-income households. Among them: He’d allow more generous rules for refundable credits to expire and let a college education tax credit fade away.

Keep in mind the TPC estimates assume the 2010 payroll tax cut already expires as scheduled in a few weeks. Boehner strongly supports this, and Obama doesn’t seem to be fighting hard to retain the provision. As a result, many workers would see an additional cut in their take home pay averaging about $700.

These analyses always get tangled up in baseline questions. For instance, TPC assumes a somewhat different AMT patch than is included in Plan B.  Another key question:  When thinking about what happens to someone’s taxes, what do you assume about the temporary stimulus tax cuts of 2009 and 2010.

But whatever baseline is appropriate for budget reasons, I’m partial to the “feels-like” test. That is, many real people will pay higher taxes in 2013 than they did in 2012. To them, that will feel like a tax increase, whether or not you feel a tax provision should expire after Dec. 31.

However you come down on this, it is fair to say that when it comes to taxes working class families may well end up worse off next year than they are today. So may millionaires. But households making between $200,000 and$1million may be largely protected from tax hikes. Does that really sound like a sensible and fair way to cut the deficit?

7Comments

  1. Michael Bindner  ::  2:41 pm on December 20th, 2012:

    The “feels like” question should also include whether wages go up at the start of the year. If this had come with an increase in the minimm wage, it would have been more palatable. The whole reason for many of these breaks was a desire to not have to make raises to these minimums. Indeed, the fact that such tax breaks essentially subsidize the ability of low wage employers to not bear such increases themselves is a bit troubling.

  2. Ralph H  ::  3:11 pm on December 20th, 2012:

    If the payroll tax holiday expires, it would seem like people in the 200K and up category would pay more on that W2 income up to the cap amount. For instance if my wife and I each make 100K we would be hit 4K more in 2013. Granted, if our total income were 500K the increase in percentage of total would be less than a lower income group, but it would still be an increase.

    I find it interewsting that after being pounded by Democratic/Liberal voices about how the Bush tax cuts were for the wealthy, we suddenly are focusing on how ending any part of them is hurting the less fortunate. Lets be clear; all Americans saved significant money by these cuts (and the payroll holiday) and any partial change will be costly.

  3. Tax Roundup, 12/21/2012: Plan B breaks, Tiger tamed. « Roth & Company, P.C  ::  9:40 am on December 21st, 2012:

    […] Howard Gleckman,  Should Working Class Families Pay Higher Tax so High Income People Can Pay Less? (TaxVox) […]

  4. Weekly Round-Up: December 21, 2012 | Tax Credits for Working Families  ::  2:24 pm on December 21st, 2012:

    […] Post 1, 2, The Huffington Post 1, 2, The Center on Budget and Policy Priorities, Politico, The Tax Policy Center, Salon, National Women’s Law Center, Fire Dog Lake, The New […]

  5. Accountingdiaries.com  ::  9:17 pm on December 26th, 2012:

    I don’t think that a family earning 250k in a big expensive city and a family with the same income in a small cheaper city in TX should be considered the same.

    I think that the first thing that should be done is to rationalize the costs.

  6. Oscar  ::  4:03 pm on December 27th, 2012:

    “I don’t think that a family earning 250k in a big expensive city and a family with the same income in a small cheaper city in TX should be considered the same.”

    How do you figure? It sounds like you think residents of New York or San Fransisco deserve a subsidy for their choice of zip code.

  7. T Will  ::  10:19 am on January 1st, 2013:

    The Reagan Administration removed the income tax liability of millions of lower middle class americans, but didn’t repeal their right to vote. While we can all agree that limiting the vote according to race or sex, is unacceptable, the logic behind requiring someone to pay into the system before giving them a vote seems to make more sense today than ever. It’s obvious that getting elected by appealing to the 10% that pay the bills, is futile when the 70% that receive more from the government than they pay in can just vote themselves a raise. This is the same type of bad policy as putting the entire burden of financing the government on an increasingly smaller number of wealthy individuals…..because these people have the greatest ability to find ways of shielding their income from taxation…..not to mention, they can easily LEAVE.. When you don’t pay anything, you have very little incentive to say “no” to more government spending…after all, you aren’t paying for it. They have consistently voted for anyone that promises them MORE