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Tax Debate Should Focus on Real Middle Class

Proponents of extending President Bush’s costly tax cuts for people making over $250,000, which the non-partisan Congressional Budget Office (CBO) has rated the worst of all options under consideration for boosting a weak economy, are resorting to increasingly dubious claims to buttress a weak case.  Two examples are in today’s papers:

The first comes from House Minority Whip Eric Cantor (R-VA), whose Wall Street Journal op-ed tries to make the case that these high-income households — the most affluent 2 percent of people in the country — are part of the middle class.  This is a stretch, to say the least.

Families that really are middle class, such as those making $60,000, $80,000, or even (in some areas) $125,000, would face a tax increase under the new tax proposal from Senate Republicans.  That’s because the plan would not extend President Obama’s temporary Making Work Pay Credit, which benefits 95 percent of all taxpayers, and leading Republicans have made clear that they regard letting a temporary tax cut expire on schedule as a tax increase.  (The Senate Republican plan would extend all of President Bush’s tax cuts, including those for families over $250,000.)

All of those middle-class families thus would pay $800 more in taxes next year under the Senate Republican plan (or $400 more if they have one wage earner).

Moreover, CBO estimates that Making Work Pay generates more than twice as much economic growth as the high-end tax cuts, per dollar of cost.  The reason is simple:  middle-class people tend to live paycheck to paycheck, so they generally will spend rather than save a larger share of a tax cut than high-income people will.

The second example comes from columnist Robert Samuelson, whose Washington Post column argues that we should extend the high-income tax cuts because the top 2 percent of Americans account for a quarter of all spending.  This ignores two key facts:  most of the remaining three-quarters of spending comes from the vast middle-class working population that Making Work Pay is designed to benefit, and a big chunk of any tax cut aimed at high-income tax people would be saved rather than spent so wouldn’t boost the economy in the short term.

The best approach would be to extend all of the middle-class tax cuts (both Bush’s and Obama’s), let the Bush high-end tax cuts expire on schedule to lock in huge long-term budget savings, and redirect those savings for one year to a robust tax credit for small and large business that hire more workers.

Chuck Marr
Vice President for Federal Tax Policy