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Obama's Tax Cuts Actually Raise Taxes for the Poor: Say What?

By Jay Anderson on Dec 9th 2010 4:34PM

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Obama's Tax Cuts

UPDATE: House Democrats Reject Obama Tax Cut Deal In Non-Binding Vote, Demand Changes

There's really no point in continuing to pile on to the criticism of President Obama's tax-cut compromise with the GOP. That's been discussed ad nauseum, and me adding further quips would just be demeaning, cruel and unnecessary. However, I must say that given the President's awesome negotiation skills, I'd sure love to buy a new car from him.

Zing!

While the "rich get even richer" nature of the compromise has been well documented, one obscure provision that adds insult to injury to those at the other end of the economic spectrum has been largely overlooked. That's right, some poor folks are actually going to end up owing more in taxes:

The deal to extend the Bush-era tax cuts for two years includes a bevy of additional credits and deductions that will reduce the burden on nearly all households. But the tax benefits will flow most heavily to the highest earners, just as the original cuts did when they were passed in 2001 and 2003. At least a quarter of the tax savings will go to the wealthiest 1 percent of the population.

The tentative deal includes a two-year patch for the alternative minimum tax, a reduction in the payroll tax and a plan to reinstate the estate tax with lower rates and higher exemptions than in 2009 - all of which will offer far more savings for high earners than those in the low- or middle-income bracket. The wealthiest Americans will also reap tax savings from the proposal's plan to keep the cap on dividend and capital gains taxes at 15 percent, well below the highest rates on ordinary income.

That is good news for hedge fund managers and private equity investors, who appear to have withstood an effort to get them to pay more by eliminating a quirk in the tax code that allows most of their income to be taxed at just 15 percent.

In fact, the only groups likely to face a tax increase are those near the bottom of the income scale - individuals who make less than $20,000 and families with earnings below $40,000. The proposal does not include an extension of Mr. Obama's signature tax cut, the Making Work Pay credit, which provided a credit of up to $400 for individuals and $800 for families of low and moderate income.

Although the $120 billion payroll tax reduction offers nearly twice the tax savings of the credit it replaces, it will nonetheless lead to higher tax bills for individuals with incomes below $20,000 and families that make less than $40,000. That is because their payroll tax savings are less than the $400 or $800 they will lose from the Making Work Pay credit.

"It will come to a few dollars a week," said Roberton Williams, an analyst at the nonpartisan Tax Policy Center, "but it is an increase."


Wow. Just. Wow.

Folks -- what more can I say about how raw a deal this was? I simply can't see anything good that came of these negotiations. Obama added to the deficit. He caved in to the right. He walked back on a campaign promise. This is a textbook lose-lose.

This won't help the jobs forecast, because tax cuts for the rich have repeatedly proven to have no tangible economic impact for the good. He could have just as easily separated the unemployment benefits issue from the tax cuts and forced the GOP to cave in. They've only done this whole "posturing about the deficit, then voting for unemployment benefits anyway" thing about, oh, three-four times already this year. Why allow them to highjack one issue (unemployment) by attaching an unrelated one (tax cuts for the rich), when neither solves what's presumably the biggest issue (jobs! jobs! jobs!) facing the economy?

Sure, this tax hike for the poor is relatively minor, but it's merely a reflection of the bigger issue.

The rich will get richer. And the poor will get poorer. On President Obama's command. Not a good look.

Jay Anderson is a freelance writer from Washington, DC, whose work has been featured in the Washington Post and on NPR. When he's not busy talking smack here, he runs the award-winning blog AverageBro.com. Follow him via Twitter @AverageBro.


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