The $80 Billion Middle Class Tax Hike

In this week's Watcher, we ponder the fate of fiscal policy in the lame duck session of Congress set to commence on Nov. 15. Our article and indeed most of the punditry, analysis, news, and campaign rhetoric has all but completely ignored the fate of some $80 billion in tax breaks for the middle class.

When President Obama signed the Recovery Act into law last year, he approved $288 billion of tax cuts, focused mostly on the middle class (and went largely unnoticed by its beneficiaries). Those cuts, including the Making Work Pay tax credit, a boost in the child tax credit, and assorted other credits and deductions totalling about $80 billion are set to expire at the end of the year. Yet the most ink has been spilled over the $68 billion in tax cuts that the riches 2 percent of Americans may see expire at the same time.

Bob Williams ponders this issue in a post on the Tax Policy Center's blog, Tax Vox.

Taxes will jump for more than 95 percent of Americans when those cuts evaporate come January.

Why does a $68 billion tax increase on wealthy taxpayers throw Congress into total gridlock but no one mentions a tax hike almost 20 percent bigger? ...a triumph of politics over economics: stimulus is a dirty word in Washington these days, even though most economists agree that the economy still needs a strong boost. And maybe "economist" is a dirty word too.

Arguably taking $80 billion away from all but the richest Americans would hurt spending more than pulling $68 billion out of fat wallets. Low- and moderate-income households save less of their income than do wealthier people, so raising their taxes causes a bigger drop in consumer demand.

It's almost as if Congress, despite its members' protestations, is more interested in sculpting tax policy for its donor-patrons than actually trying to improve the economy.

Image by Flickr user Ciudadano Poeta used under a Creative Commons license.

back to Blog