The Tax Cut No One NoticedOctober 20, 2010 - by Donny Shaw
Did you notice that your federal tax bill was lower last year? If you’re like most people, you didn’t. But believe it or not, one of the first things Barack Obama and 111th Congress did when they took office in 2009 was pass an income tax cut for about 95% of U.S. tax payers. The New York Times reported yesterday on why this went so unnoticed:
In a troubling sign for Democrats as they head into the midterm elections, their signature tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed.
In a New York Times/CBS News Poll last month, fewer than one in 10 respondents knew that the Obama administration had lowered taxes for most Americans. Half of those polled said they thought that their taxes had stayed the same, a third thought that their taxes had gone up, and about a tenth said they did not know. As Thom Tillis, a Republican state representative, put it as the dinner wound down here, “This was the tax cut that fell in the woods — nobody heard it.”
Actually, the tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.
They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.
You can read the provision that was signed into law in stimulus bill right here:
SEC. 1001. MAKING WORK PAY CREDIT.
(a) In General- Subpart C of part IV of subchapter A of chapter 1 is amended by inserting after section 36 the following new section:
‘SEC. 36A. MAKING WORK PAY CREDIT.
‘(a) Allowance of Credit- In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the lesser of—
‘(1) 6.2 percent of earned income of the taxpayer, or
‘(2) $400 ($800 in the case of a joint return).
While this is the largest tax cut item in the stimulus, the bill also contained hundreds of billions of dollars in other tax cuts. ProPublica provides a comprehensive list. It includes the first-time homebuyer credit, an increase in the earned income credit, an AMT patch, the “American Opportunity” education credit and dozens of other items. When you include all tax cuts affecting businesses, states, homeowners and the unemployed, these cuts amount to about $500 billion, almost twice as much as the amount of spending items in the bill.
Of course, the 111th Congress has passed tax hikes as well. The federal tobacco tax was increased by about $65 billion as a pay-for for expanding the State Children’s Health Insurance Program (S-CHIP). The health care bill created a new tax on people who don’t get qualifying health insurance and aren’t exempt under the financial hardship clause. The health care bill also directs several tax hikes at specific practices it hopes to discourage, including indoor tanning and “Cadillac” health plans. I wrote more about the tax hikes in the health care bill here.
The biggest tax debate of the 111th Congress hasn’t happened yet. In 2001, President Bush and the 107th Congress passed the Bush tax cuts using the budget reconciliation process, which allowed them to avoid a likely Democratic filibuster, but required that they design the cuts to expire after 10 years. Those 10 years are up on January 1, 2011. President Obama and most Democrats want to make the Bush tax cuts permanent for everyone who makes less than $250,000 per year ($500,000 for couples). Republicans tend to want to make the cuts permanent for everyone, including those making more than $250,000. The fight over what to do with the expiring Bush tax cuts is going to take up much of the lame-duck session, and it’s unclear right now how it will play out. But even if it happens that the Democrats and Republicans can’t strike a deal on this and no bill gets passed, remember that that would not be a tax hike by the 111th Congress. It would be a tax hike by the 107th Congress. Seems like a fair trade-off to me — skip a filibuster, have your bill expire in 10 years.