When President Obama defended his tax cut compromise with the Republican Party, he insisted that he was helping working people avoid taking a pay cut. "I'm focused on making sure that tens of millions of hardworking Americans are not seeing their paychecks shrink on Jan. 1, just because the folks here in Washington are busy trying to score political points," Obama said.
But as tax experts look at the proposal more closely, it has become clear that the working poor will actually end up losing money under the new arrangement.
"Single working people with earnings below $20,000 and married couples with earnings below $40,000 are worse off under the payroll tax cut proposals in the compromise between the president and the Republicans," explains Bob Williams, a senior fellow at the Washington, D.C.-based Tax Policy Center.
Here's why: The Obama proposal substitutes a Social Security payroll tax cut for the Making Work Pay credit, which was targeted to do the most good for low-income families. Under current rules, the working poor receive $400 when they earn at least $6,452 a year through the Making Work Pay credit. Married couples with earnings above $12,900 get $800 under the program.
The compromise cuts the Social Security payroll tax from 6.2% to 4.2%, so a couple wold have to earn $40,000 to get the same $800 tax benefit. Every working-class couple earning less than that will get less than $800, meaning they lose money under the Obama proposal.
Benefit to the Rich Increases Fivefold
The rich, however, do really well. A worker earning $106,800, the maximum amount of income subject to Social Security tax, stands to save $2,136 in payroll taxes. A married couple with both spouses making over $100,000 will actually save $4,272.
Obama had been saying for months that he wanted to increase the tax burden on the wealthy while keeping it the same for the middle class. But the new plan actually increases the tax burden on the lowest-income working families. "If you are worried about who needs the money and are trying to help people, targeting the cuts to the wealthy who don't need it seems the wrong way to go," Williams says.
While the Obama plan doubles the projected stimulus effect -- the payroll tax cuts will total $120 billion, while Making Work Pay is only $60 billion -- the plan is unlikely to be as effective dollar-for-dollar in getting people to spend.
"Money going to the rich is not going to juice the economy the same way as money going to the poor does," says Williams, "because the poor spend every penny they get, and the rich save a chunk of theirs, and that's not stimulative."
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