Center for American Progress

Tax Agreement Needs Adjustment to Help Low-Income Workers
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Tax Agreement Needs Adjustment to Help Low-Income Workers

As part of the recently announced tax framework agreement between the president and Republicans in Congress, the Making Work Pay credit, originally passed as part of the Recovery Act, will be allowed to expire as scheduled at the end of this year, raising taxes for about 25 million working people.

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The recently announced tax framework hammered out by President Barack Obama and Republicans in Congress contains some rather detestable elements. Slashing the estate tax, which benefits just the biggest 5,000 estates in the country, and forcing the federal government to borrow another $120 billion to finance special tax cuts for the wealthiest 2 percent are not pleasant pills to swallow. But this was the price demanded by Republicans in exchange for desperately needed assistance to job seekers, for middle-class tax cuts, and for vital tax incentives for business to invest and expand.

Conservatives were willing to accept nothing less than billions of dollars in giveaways to the rich or else they would force higher taxes on everyone—and there appears to be little anyone could do to convince them otherwise. But there is one revolting aspect of this deal that still could be fixed—an unintended tax increase on low-income workers.

As part of the deal, the Making Work Pay credit, a $400 tax credit ($800 for couples) originally passed as part of the American Recovery and Reinvestment Act, will be allowed to expire as scheduled at the end of this year. A 2 percent reduction in the Social Security payroll tax paid by employees will take its place. In many ways, this is a good switch. The payroll tax cut, like the Making Work Pay credit, will help nearly every working person. Overall, it will actually be a bigger tax cut. And economists argue that a payroll tax cut is a relatively good way to create growth and jobs.

But there is one big huge caveat: about 25 million working people who will actually have to pay more in taxes next year because of this switch.

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