Obama's deal will raise taxes for some low-income workers

McClatchy NewspapersDecember 8, 2010 

WASHINGTON — The tax deal struck this week between the White House and congressional leaders has a little bit for most taxpayers in the country. But some of the nation's poorest workers will actually end up worse off.

The president's proposal, struck in a deal with congressional Republicans, would lower the Social Security taxes on all workers in the nation by 2 percentage points.

At the same time, the proposal eliminates the "Making Work Pay" tax credit that was originally part of President Barack Obama's 2009 stimulus package and reduced Americans' taxes by up to $400 for an individual or $800 for a couple.

When comparing the Social Security reduction versus the current tax credit, middle- and upper-income Americans will fare far better under the new proposal. But some lower-income workers won't.

The break-even point is $20,000 for an individual and $40,000 for a couple. All other things being equal, make less than those figures in a year, and your taxes will go up come Jan. 1, 2011. Make more and they'll go down.

"It's disappointing," said Michael Linden, the associate director for tax and budget policy at the liberal Center for American Progress. "These are people working really hard ... We're asking minimum wage workers to pay slightly more in taxes."

Added Roberton Williams, senior fellow at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution. "It's not a huge increase. But if you're only making $10,000 a year, and your taxes go up a few hundred dollars, that's noticeable."

For the high-income workers, the newest tax deal could bring in more than $2,000 for an individual or $4,000 for a couple, since they will see a 2 percentage point drop in their Social Security tax rates from 6.2 percent to 4.2 percent. All income up to $106,800 is subject to Social Security taxes.

Although low-income singles who don't qualify for certain tax credits will pay more, the White House said Wednesday it isn't fair simply to look at the impact of the Making Work Pay credit versus the Social Security reduction. Other provisions of the tax deal — such as the child tax credit — affect low-income families; when combined with the Social Security tax reductions, families will be better off under the negotiated deal.

Experts who were disappointed in the impact on lower-income workers were still generally supportive of the overall plan, however. That's because — whatever the impact on individual Americans — the impact on the broader economy will be greater with the Social Security tax reduction.

The proposed reduction in Society Security taxes will pump an estimated $120 billion into the economy — twice as much as would have the Making Work Pay credit.

"There clearly are progressives upset about this deal, and would like to see it improved," Linden said. "But I think it should pass."

Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a liberal policy research group, likewise ultimately supported the overall package. "I think it will provide a much-needed boost to the economy."

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