Bush Cut Compromise Hurts the Poor, Fattens the Rich

When President Obama announced his compromise with Republicans in extending the Bush-era tax cuts, he managed to anger pretty much everybody. He didn’t make any friends in the GOP when, in defending the compromise, he called Republicans “hostage-takers“. And many liberal democrats aren’t supporting the compromise because they feel he gave away too much: The compromise preserves lower taxes for couples making more than $250,000/year.

But the president insists that the compromise needs to go forward. In his words…

If Republicans truly believe we shouldn’t raise taxes on anyone while our economy is still recovering from the recession, then surely we shouldn’t cut taxes for wealthy people while letting them rise on parents and students and small businesses.

But here’s the problem: If the compromise moves forward as agreed, it will actually benefit the wealthy a lot more than it will the working poor.

That’s because the president’s proposal eliminates the Making Work Pay tax credit, which gave working couples earning less than $150,000 a credit of 6.2 percent of income, with a maximum of $800. (The credit was 6.2 percent because that’s how much is withheld for social security – that’s what it was designed to offset.)

So to get the maximum $800 credit, a couple only had to earn $12,900 (6.2% of $12,900 = $800.)

In it’s place, the compromise cuts the Social Security payroll tax for everyone from 6.2 percent to 4.2 percent for 2011. Which means that a working couple earning $12,900 will save 2 percent of that, or $258. In order to get the same $800 benefit they did with Making Work Pay, a couple will have to earn $40,000: Any less and they’ll be worse off.

Now, what about the rich? A couple where each spouse is making $100,000 wouldn’t have qualified for Making Work Pay. But they will qualify to pay only 4.2 percent in Social Security rather than 6.2 percent – everyone does. Which means if each earns $100,000, they save $2,000 each, $4,000 total.

Bottom line? Couples earning less than $40,000/year would have been better off extending the Making Work Pay tax credit, which was scheduled to expire Dec. 31, 2010. Despite our president insisting his goal is to help the working poor at the expense of the wealthy, under the proposed compromise, upper income folks will be up to $4,000 better off next year.

What’s that expression about the rich getting richer?