Off the Charts Blog | Center on Budget and Policy Priorities

Today we sat down with Chuck Marr, Director of Federal Tax Policy at the Center, to discuss the debate about taxes that will take center stage when Congress returns after Labor Day.

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Chuck, President Bush’s large tax cuts from 2001 and 2003 are due to expire at the end of this year. What tax cuts are we talking about?

The expiring tax cuts can be divided into two components: first, the so-called middle class tax cuts and, second, the tax cuts for those at the high-end of the income scale.

What are these middle class tax cuts?

The key middle class tax cuts are the expansion in the child tax credit, a reduction in some of the lower tax bracket rates, and marriage penalty relief which is designed to make sure that two people don’t face higher taxes if they get married – and file jointly.

Who benefits from these middle class tax cuts?

This point is essential in understanding how the cuts work. The provisions in the so-called middle class tax cuts are actually broadly based. This means that most taxpayers get some benefit from one or more of the provisions.

I think some people would be surprised to learn that, in dollar terms, high income people tend to actually get the most benefit out of these so-called middle class tax cuts.

This is because the income tax is more like a stair case than an elevator. High income people do not go directly to the top floor and pay the top tax rate on all of their income. Instead, they walk up the tax bracket stairs and pay different rates for different portions of their income. For example, this means that if one of the middle class tax bracket rates is cut all of the people that have incomes above that rate – higher up the staircase – also get a tax cut.

So, although high-income people benefit, should the middle class tax cuts be extended?

Yes, absolutely. These tax cuts do provide relief to middle class people. And middle class people tend to live paycheck to paycheck and consequently need to spend whatever money they earn. Given how weak the economy still is, it’s very important to keep the tax cuts flowing to middle class people so that they keep injecting the money back into the economy and thereby stimulating growth.

What about the high income tax cuts – what’s in that package?

These are tax cuts that exclusively benefit couples making more than $250,000 and singles making more than $200,000. The centerpiece of this package is the top two rates which are set to return to levels that prevailed during the prosperous 1990s. 80 percent of these tax cuts flow to people making more than a million dollars a year.

Would it be good policy to extend these high income tax cuts?

No, I don’t think the country can afford these tax cuts. Letting them expire on schedule – as they were intended to — would lower the national debt by one-trillion-dollars over the next decade.

Some people have argued that letting these tax cuts expire would hurt the economy in the short term. How do you respond to that?

These high income tax cuts are very different from the middle class tax cuts. Whereas middle class people live paycheck to paycheck, high income people don’t. They tend to save more of their money which means that their spending is less sensitive to these tax changes.

I completely agree though, that our most immediate concern is that nearly one in ten Americans is out of work and we need to do much more to get them back to work.

I would suggest that, in the short term, the Congress use the revenue from letting the high-end tax cuts expire to provide a generous tax incentive for small and big businesses to create jobs.

You can download a podcast of this conversation here or on iTunes.

I have written several recent posts about the importance of extending the TANF Emergency Fund, a part of last year’s federal American Recovery and Reinvestment Act that states and localities are using to help place 240,000 individuals in subsidized jobs in the private and public sectors. I won’t repeat those arguments today. Instead, I’ll share with you what people who are working because of the fund say about it.

These individuals quoted below work at the Internet Archives (a San Francisco non-profit that’s working to digitize one million books that will be available for free to school children across America), which has hired over 100 employees through San Francisco’s subsidized jobs program, Jobs Now!.:

• “There are people that honestly want to work. This program makes it happen.”
  – Erick S.
• “I was unemployed and homeless. This job has changed me and my children’s life tremendously.” – Agnes F.
• “We have seen our future again. Our life, our hope, our happiness has begun to bloom. Please don’t let it wither.” –Juandi S.
• “Without the Jobs Now! Program, I wonder where I would be and how I would feed my family.” — Alethea B.
• “Jobs Now! Has given me a sense of purpose, responsibility, and stability.”
  – Juana T.
• “I raise my 13 year-old niece who has a medical condition. I can pay for her co-payments, lab work and medication to keep her healthy and alive.” – April V.
• “Without my job, me and my kids would be on the street, homeless.”
  – Polyanna C.

You can read more quotes and stories here. Jobs Now! has placed about 4,000 individuals in subsidized jobs, far exceeding its original target of 1,000 placements. All except a few hundred subsidies will end on September 30^th if the fund is not extended.

This week on Off the Charts, we discussed the economy, why President Bush’s tax cuts for high-income households should expire on schedule, the tough budget choices states are making, Social Security, and the health reform law.

• On the economy, Chad Stone explained why new GDP figures show the economic recovery is not yet on solid footing.  Stone also highlighted a new chartbook, The Legacy of the Great Recession.  Michael Leachman commented on a new Congressional Budget Office analysis finding that up to 3.3 million people owe their jobs to the federal Recovery Act.  Donna Pavetti highlighted an op-ed in the Wall Street Journal (“Our Blue-Collar Great Depression”), where Rockefeller Foundation executive Janice Nittoli made a compelling argument for extending the TANF Emergency Fund.

• On the tax cuts for high-income households, Chuck Marr explained how extending the tax cuts may exacerbate a stunning shift in income away from the middle class and towards the highest-income people in the country over the last three decades.  We also posted a joint op-ed from Robert Greenstein, the Center’s executive director, and John Podesta, president and CEO of the Center for American Progress, on why the tax cuts should expire on schedule.
• On the state level, Elizabeth McNichol explained why most states have rejected a cuts-only approach to addressing budget shortfalls.  McNichol also sat down with us to discuss why the state budget crisis continues even though some states are reporting year-end surpluses.
• On Social Security, we showcased a new report from our colleague Kathy Ruffing outlining the program’s outlook over the short and long term.
• Lastly, on health reform, we highlighted a recent opinion piece on an element of the Affordable Care Act: a new insurance program for long-term care.  Paul Van de Water is one of the authors.

In other news, the Center released a podcast on why the state budget crisis continues even though some states are reporting year-end surpluses.  Find it on iTunes here.

The bottom line from today’s Commerce Department report on gross domestic product (GDP) is that the economy is growing far too slowly to reduce unemployment and it is still too early to declare that the recovery is on solid footing.  The recovery could definitely use a boost from further stimulus.

The new report states that the economy expanded at just a 1.6 percent annual rate in the second quarter (April-June), less than the 2.4 percent rate the Commerce Department estimated for that quarter a month ago.

The downward revision to second-quarter growth largely reflects two facts:  businesses expanded inventories by a smaller amount than the Commerce Department originally estimated, and imports made up a larger share of total spending than originally estimated.  (Imports don’t count toward GDP, which measures the output of goods and services produced by labor and property located in the United States.)

As the chart below shows, the economy has been expanding for four consecutive quarters, but the growth rate has been slowing.  Growth has to be 2-2½ percent just to keep the unemployment rate from rising.  It has to be much faster than that to restore full employment.

In his Jackson Hole speech this morning, Federal Reserve Chairman Ben Bernanke acknowledged that “the pace of that growth recently appears somewhat less vigorous than we expected.” Bernanke pointed to actions the Fed has already taken to keep monetary policy highly supportive of an economic recovery and stated that the Fed stands ready to take further actions “as needed.”

Today’s GDP report suggests that the recovery needs a boost from further monetary — and fiscal — stimulus as soon as possible.

For this and other charts on the economy, see our new chart book.

To correct some recent stories suggesting that Social Security faces deep and immediate financial problems, a new report from our colleague Kathy Ruffing outlines the program’s outlook over the short and long term. Here’s the summary:

In recent months, a few commentators have sounded an alarm about the recession’s impact on Social Security’s near-term prospects, which may lead some people to think that the program faces financial problems in the next several years. Fortunately, that is not the case. Social Security continues to run annual surpluses and remains capable of paying scheduled benefits in full for nearly three decades.

The deep recession has indisputably affected the Social Security system’s finances, as is visible in the latest projections by the Social Security trustees and by the independent Congressional Budget Office. But both organizations estimate that, under current trends, the program can continue to pay full benefits from the trust funds until 2037. Thus, Social Security faces no immediate threat.

Nevertheless, Congress and the Administration should act sooner rather than later to restore Social Security’s long-run solvency. Prompt action would allow changes to be phased in gradually and afford people ample time to adjust their financial plans.