On Jan 1st, the Bush tax cuts are set to expire. The child tax credit will be cut in half, the standard deductions and income credits decrease and the 10 percent tax bracket – aimed at non-wealthy taxpayers – goes away.
While wealthier taxpayers pay more in taxes and stand to lose more in total dollars, the impact on low-income taxpayers will be far greater since they live on much slimmer margins.
In a new report from the Tax Foundation, author Nick Kasprak points out that in spite of repeated promises that the cuts will be extended, “the current Congress has shown itself to be unusually susceptible to gridlock so the threat of automatic, full expiration of all these cuts is quite real.” In fact, even though we heard last year that the death tax would go away completely, ten months later, Democratic leaders have yet to follow through on that promise.
If predictions for Republican wins in the Senate races in Illinois and West Virginia hold true, those new members will be sworn in immediately. That will give the GOP 43 seats in the upper chamber and the Democrats will have a very difficult time getting the 60 votes they need to pass the legislation to extend the tax cuts for the middle class, but let them expire for the “wealthy.” They will then be faced with the choice to extend the cuts for ALL, or do nothing and let them expire, hurting those at the lower end of the income scale.
“When comparing changes in after-tax income, low-income workers benefited substantially from the Bush-era tax cuts, and so they would pay much higher taxes if political gridlock allows the imminent expirations to occur on schedule,” Kasprak said.
Additionally, low-income taxpayers have benefited from many temporary stimulus measures enacted in 2009 that are also set to expire at the end of this year: a further expansion of the earned income credit for couples, greater refundability of the child tax credit, and bigger credits for college education.
The Making Work Pay credit that appears in paychecks and boosts take-home pay up to $400 for individuals and $800 for couples is also slated to expire next year.
The report shows that inaction on these tax measures will cost a married couple with two dependents earning $40,000 about $2,643. Their after-tax income would drop from $41,513 (if the cuts are extended) to $38,870.
Those cuts could have been extended if the Blue Dog coalition, led by Jim Matheson, had not hidden behind Pelosi’s skirts.