In trying to reach a compromise on the 'fiscal cliff,' Democrats and Republicans seem determined to protect millions of high-income people from paying more taxes. But the working class could easily end up paying more.
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?