Article

Standing in the Way of Middle-Class Tax Cuts

The House of Representatives Should Act Now to Pass the Senate Bill to Extend Middle-Class Tax Cuts

The House should drop its insistence on continued tax cuts for high incomes and join the Senate in enacting tax relief for 98 percent of households, write Seth Hanlon and Sarah Ayres.

House Speaker John Boehner (R-OH) stands next to a portrait of former President George W. Bush as he waits to speak with reporters on Capitol Hill in Washington, Tuesday, July 24, 2012, following a House GOP caucus meeting. (AP/J. Scott Applewhite)
House Speaker John Boehner (R-OH) stands next to a portrait of former President George W. Bush as he waits to speak with reporters on Capitol Hill in Washington, Tuesday, July 24, 2012, following a House GOP caucus meeting. (AP/J. Scott Applewhite)

The House of Representatives has the opportunity this week to extend tax cuts for all Americans and dramatically reduce the uncertainty surrounding the so-called “fiscal cliff” at the end of the year. If the House approves legislation the Senate passed last week, President Barack Obama stands ready to sign it into law immediately. The only thing stopping that from happening is the House Republicans’ insistence on maintaining additional tax cuts for high-income households.

Under the Senate-passed bill, 98 percent of Americans would keep all of the income tax cuts they enjoy now and pay no more in taxes next year. The richest 2 percent of Americans would continue to benefit from the “Bush” tax cuts on their first $250,000 of yearly income ($200,000 for couples), but would pay higher rates on income exceeding those levels. In all, wealthy Americans would pay more than they do now, but less than they would if Congress did nothing. (The Senate bill is S. 3412. An identical version was introduced by House Democrats as H.R. 15.)

The House Republican leadership bill (H.R. 8) purports to extend all tax cuts, including those for the rich, but in fact it would raise taxes on about 25 million working Americans. That is because it lets enhancements to three tax credits benefitting middle- and low-income families expire. H.R. 8 has no chance of reaching the president’s desk—the Senate rejected a substantially identical version—and he would not sign it anyway.

The House should drop its insistence on continued tax cuts for high incomes and join the Senate in preventing a tax increase on 98 percent of Americans next year. Figure 1 shows the surprising breadth of agreement in Congress on the need to extend tax cuts into 2013—except for House Republicans’ continued refusal to extend middle-class tax cuts without also extending the additional high-end tax cuts. (see Figure 1)

Figure 1

Comparing the House and Senate approaches on tax cuts

Because the Senate bill extends tax cuts on all income under $250,000 ($200,000 for singles), it means that 114 million families, or 98 percent of taxpayers, will not face any tax increase next year. That includes 97 percent of small businesses. Extending tax cuts for 98 percent of Americans would prevent an average middle-class tax increase of $1,600, or about $2,200 for a typical family of four.

The 2 percent of Americans with the highest incomes would still enjoy the current lower rates on all of their income up to the income thresholds, but would pay the higher rates that existed during the Clinton presidency on income exceeding those levels. And families just above the $250,000 threshold (up to $300,000) would keep 98 percent of their tax cuts, resulting in a minuscule tax increase.

By contrast, the House bill, which purportedly extends all tax cuts, would actually raise taxes on about 25 million families by rolling back enhancements to tax credits enacted under President Obama in 2009. Specifically:

  • 11 million families paying for college would lose American Opportunity Tax Credits worth an average of $1,100. This tax credit defrays a larger portion of tuition costs than previously existing credits, is available to third- and fourth-year college students, and is partially refundable (up to $1,000 can be claimed by students or families even if they do not owe federal income tax in a given year).
  • 12 million families raising children would lose some or all of their Child Tax Credits, costing them an average of $800. The Child Tax Credit provides a $1,000 per-child credit to reflect the costs of raising children. An improvement enacted in 2009 enhanced many low-income families’ eligibility for the tax credit by allowing them to count more of their earnings toward the credit’s refundable portion.
  • 6 million working families would lose some or all of their Earned Income Tax Credits, costing them an average of $500. In 2009 the Earned Income Tax Credit was also expanded to provide an additional benefit for families with three or more children.  In addition, the tax credit’s “marriage penalty” was reduced, meaning that couples who get married and combine their earnings do not lose as much of the credit as they did before. The House Republican bill’s failure to extend this provision is notable given the party’s expressions of concern for reducing marriage penalties in the tax code. 

Though the high-income tax cuts receive much more attention, the looming expiration of these tax credit provisions would affect far more people. In fact, by failing to extend them, the House Republican bill raises taxes on more than 10 times as many people as the Democratic plan. (see Figures 2 and 3)

 

Figures 2 and 3

 

Indeed, fully 37 percent of families with children would face a tax increase next year under the Republican plan. The GOP tax plan would raise taxes on 18.6 million families with children, including 9.2 million single parents. (see Figure 4)

Figure 4

In sum, the Senate bill is not just the only legislation with a realistic chance of reaching the president’s desk. That bill ensures that many more families’ taxes do not go up at the end of the year. The only thing standing in the way of continuing tax relief for 98 percent of Americans and dramatically easing the “fiscal cliff” is the House Republicans’ insistence on continuing the wasteful high-end tax cuts. The House should not miss this opportunity to ensure tax cuts for 98 percent of American households.

Seth Hanlon is Director of Fiscal Reform and Sarah Ayres is a Research Associate at American Progress.

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Authors

Seth Hanlon

Former Acting Vice President, Economy