Wednesday, November 26th, 2014

The Obameter

Create a tax credit of $500 for workers


Enact a Making Work Pay tax credit that would equal 6.2 percent of up to $8,100 of earnings (yielding a maximum credit of approximately $500). Indexed for inflation.

Updates

New payroll tax 'holiday' means restructured tax credits, with varied results

President Obama won another year of tax reductions for workers in a major tax compromise that he signed into law right before Christmas. But thanks to the intricacies of tax law, some workers will get slightly bigger breaks in 2011, while others do slightly worse.

To review the history: President Obama campaigned on tax breaks for workers, proposing a rebate that would equal about $500 a year -- technically, the first 6.2 percent of the first $8,100 of earnings. Congress accepted his proposal, including it in the economic stimulus of 2009, but they trimmed it back slightly to a maximum of $400. The tax credit, known as "Making Work Pay," expired at the end of 2011.

So the first time around Obama got slightly less than he wanted, and he only got it for two years. At the time, we rated his promise Compromise.

In December 2010, Obama brokered a broad tax deal with Republicans, avoiding automatic tax increases that were scheduled to take effect and extending some of the tax breaks from the stimulus. But the Making Work Pay tax credit didn't make the package. Instead, the bipartisan compromise created a 2 percent tax "holiday" from payroll taxes that workers pay toward Social Security.

The Social Security tax cut needs a little explaining unless you're intimately familiar with payroll taxes. Normally, workers pay 6.2 percent in payroll taxes on up to $106,800 of their earnings. (Employers pay another 6.2 percent, while the self-employed are generally on the hook for the full 12.4 percent.) The tax cut means workers will pay only 4.2 percent of their earnings. So if you make $106,800 or more, you could save $2,136 in payroll taxes in 2011 -- clearly much more than the Making Work Pay tax credit.

But let's say you make much less than that. We did a back-of-the-envelope calculation and found that if you make less than $20,000, you will likely be worse off under the new plan, getting a smaller tax break than the $400 that was part of the stimulus.

The nonpartisan Tax Policy Center ran a preliminary analysis comparing the tax breaks and found that, generally speaking, people who earn less than $10,000 would probably see higher taxes of about $203 a year. Those who earn between $10,000 and $20,000 could see a an increase of about $185 per year. We should note that's still a little better than before Obama took office; it's just not as good as 2010.

Still, the Tax Policy Center analysis shows that about two-thirds of tax payers would be the same or better off under the the Social Security tax cut than under Making Work Pay. The more money you make, the better off you are.

Finally, we should point out that most workers will see these tax changes in the form of small increases (or decreases, in the case of lower earners) in their regular paychecks. The Obama administration has said that it favors giving out tax breaks through people's paychecks because recipients are more likely to spend the extra dollars in their paychecks and thus stimulate the economy.

So what does all this mean for our rating of Obama's tax promise?

Well, the Social Security tax cut is similar to Making Work Pay, but it's not the same. Many tax payers will likely be better off the new plan, but not all will be. And, the Social Security tax cut is only for one year. Under current law, in 2012 workers will have neither the Social Security tax cut nor the Making Work Pay, so their tax rates will be the same as when Obama took office. We anticipate checking back on on this promise then.

Taking all this together, we rate this promise Compromise.

Sources:

Tax Policy Center, Making Work Pay Credit versus Social Security Tax Cut; Baseline: Current Policy; Comparison of Benefits by Cash Income Level, 2011

Social Security, Electronic Fact Sheet, Update 2010

Thomas, Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
The White House, Statement by the President on Tax Cuts and Unemployment Benefits, Dec. 6, 2010

The White House, Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance, Dec. 7, 2010

The White House, Press Conference by the President, Dec. 7, 2010

Tax compromise may cut taxes for workers.


When we last checked in on this promise, we rated it Compromise. As part of the stimulus legislation of 2009, Obama won a two-year, $400 tax credit for workers.

This week, though, President Barack Obama sacrificed one of his top campaign promises -- raising taxes on high earners -- as part of a compromise with Republicans to extend current tax rates for everyone for another two years.

Though Obama reversed his position on tax increases for the wealthy, he's didn't trade it away for nothing. In exchange, among other things, Obama got a significant payroll tax reduction for 2011 that will increase take-home pay for workers.

The payroll tax reduction significantly increases tax breaks for workers in 2011, much more than the Making Work Pay tax credit of 2009 and 2010.

The payroll tax holiday would mean $400 for the year for workers who make $20,000; $800 for workers who make $40,000; and $2,000 for workers who make $100,000. Social Security taxes only apply to income up to $106,800, so the measure particularly benefits workers below that threshold. That's significantly more than the $500 maximum tax credit that was part of Obama's campaign promises.

The payroll tax holiday could inject $120 billion into the economy, said Gus Faucher, director of macroeconomics at Moody's Economy.com.

"We think it is going to make a substantial difference for job growth compared to what we were expecting just last week," Faucher said. The forecasting group increased its estimates for job growth in 2011 from 1.3 million new jobs to 2.8 million new jobs, based on the payroll holiday and a few other smaller measures included in the framework.

We're going to be watching the tax package as it makes its way through Congress. If successful, this measure could dramatically exceed Obama's campaign promise. For now, we're changing the ruling on this promise from Compromise and moving it back to In the Works.

Sources:

The White House, Statement by the President on Tax Cuts and Unemployment Benefits, Dec. 6, 2010

The White House, Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance, Dec. 7, 2010

The White House, Press Conference by the President, Dec. 7, 2010

Congress trims Obama's tax cut for workers

One of the bigger pieces of the economic stimulus bill is the "Making Work Pay" tax credit, an initiative that Obama mentioned often during his campaign. If you ever heard Obama say he would give a tax cut to "95 percent of working families," this program is the origin of that claim.

Obama said the credit was intended to offset payroll taxes, which are automatically deducted from most workers' paychecks. Even if workers make so little that they do not owe income tax, the payroll taxes are not refundable. This is supposed to reimburse them for that. Under Obama's plan, the tax credit would be worth about $500 per worker, or $1,000 for working couples.

The initial version of the stimulus bill in the House, like Obama's original promise, was for $500 per worker. But that was reduced in the Senate to $400 per worker as a way of reducing the overall cost of the package. That lower level of $400 per worker, for a total cost of $116.2 billion, made it into the final bill. Obama signed the American Recovery and Reinvestment Act of 2009 on Feb. 17, 2009.

We should also note that the stimulus bill provides the tax cut only for 2009 and 2010. If Obama wants the tax cut to continue beyond those years, he will have to include it in future budget legislation. Indeed, it's possible Obama could raise the amount to $500 that way. But for the present, we find Obama tried to fulfill his promise and fell slightly short of the goal because Congress trimmed it to $400. That's what we call Compromise.

Sources:

Thomas, The American Recovery and Reinvestment Act of 2009 , accessed Feb. 17, 2009

PolitiFact.com, Tax cuts for 95 percent? A closer look , Oct. 20, 2008

Committee plan includes tax cut

Barack Obama is one step closer to achieving his promise of a $500 tax cut for workers.

The U.S. House of Representatives Ways and Means Committee released its plans for a major stimulus bill, and the tax cut is part of that.
 
"For 2009 and 2010, the bill would provide a refundable tax credit of up to $500 for working individuals and $1,000 for working families," said a summary released by the committee on Jan. 16, 2009. "This tax credit would be calculated at a rate of 6.2 percent of earned income, and would phase out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 for married couples filing jointly). Taxpayers can receive this benefit through a reduction in the amount of income tax that is withheld from their paychecks, or through claiming the credit on their tax returns."
 
We're keeping the status of this promise as In the Works.

Sources:

U.S. House of Representatives, Committee on Ways and Means, " The American Economic Recovery and Reinvestment Plan ,"  Jan. 16, 2009, accessed Jan. 18, 2009

Tax cut is included in economic recovery plan

One of Barack Obama's oft-repeated promises was a middle-class tax cut. During the campaign, he proposed it as rebate on payroll taxes for most workers.

Obama's team has been working on a major economic proposal to jump-start the economy, and Obama has said a tax cut will be part of that.

"To get people spending again, 95 percent of working families will receive a $1,000 tax cut — the first stage of a middle-class tax cut that I promised during the campaign and will include in our next budget," Obama said in a speech at George Mason University.

We'll be watching to see if this proposal actually becomes law.

Sources:

Barack Obama transition Web site, speech at George Mason University , Jan. 8, 2009