Blog Post by: Benjamin Landy, on July 31, 2012
(Updated post July 31) The Senate on Wednesday took a symbolic up-or-down vote on both parties' proposals to replace the Bush tax cuts, narrowly passing the Democratic plan to extend low rates for the middle class while letting them expire for earnings over $250,000 a year. The Republican "Tax Hike Prevention Act," which would preserve the Bush-era rates for another year but eliminate tax credits that benefit roughly 20 million low income families, was defeated 45-54. Senate Minority Leader Mitch McConnell declined to filibuster the vote because "it doesn’t pass constitutional muster and won’t become law" (the Constitution requires all tax measures to originate in the House) and has little chance of success in the Republican-controlled House of Representatives. Nevertheless, the Senate vote was a revealing look at the extraordinarily polarized and dishonest battle that lies ahead.
The "Tax Hike Prevention Act," which now heads to the House alongside Senate Majority Leader Harry Reid's plan, seems a puzzling name for a bill that proposes to drop the 2010 expansion of the Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit (which helped 9.1 million families afford their children's college tuition last year). All told, nearly 20 million families are expected to see their taxes rise under the "Tax Hike Prevention Act," far less than the 2.1 million high-income households that would face Clinton-era tax rates under the Democrats' plan. But according to Senate Republicans, tax credits for the poor don't count as tax cuts—they're simply “expanded stimulus spending through the tax code.”
This is remarkably dishonest, even by the standards of Washington politics. Although many of the households that receive benefits through the tax code pay little or nothing in federal income tax because they are too poor, they still have to pay state and local tax, sales tax and payroll tax. For a married couple with one child living below the poverty line, the extension of the EITC and Child Tax Credit means an extra $1,934 to pay for food, health care, and education. Disparaging these low income tax breaks as temporary spending while promoting an Estate Tax extension that benefits less than 1 percent of the population is entirely inconsistent and deeply cynical.
If Republicans want to make the case that the economy is still too weak to support higher taxes on the rich, they should do so. But then how is it possible that argument doesn't go double for the working poor?
Update: The above graph is based on a current law baseline, which means the illustrated reduction in tax rates and average tax savings assume the Bush tax cuts and all other temporary tax breaks will expire on time as planned. In other words, the Senate Republican and Democratic proposals shown are relative to current law in 2013, not the law as it is currently. That's useful for understanding what tax rates will look like in 2013 relative to the Clinton era (before either the Bush tax cuts or the 2009 stimulus), but it doesn't tell you much about how your taxes would change next year relative to this one.
For a more clear illustration of the proposed rate changes, check out the updated graph below, which is based on a recently released analysis of both Senate proposals relative to a current policy baseline. The year-over-year increase in tax rates and dollars shown below also takes into account that Congress will mostly likely extend the current Alternative Minimum Tax and the Estate Tax (estimated at its 2009 rate for Democrats and the lower-rate 2011 version for Republicans).
Whichever baseline you choose, the difference between the plans is stark. The Republican "Tax Hike Prevention Act" would prevent an increase in taxes for the richest 1 percent while raising taxes on everyone else. The largest increase would be on the working poor: $296 on average for an individual in the bottom quintile. The Senate Democratic "Middle Class Tax Cut Act," meanwhile, would keep taxes as they currently are for everyone but households making over $250,000.
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