Consumer Reports 51 Million, mostly lower-income,will do worse under new tax law

December 17, 2010

51 million, mostly lower-income, will do worse under new tax law

The federal tax bill passed by Congress yesterday includes some extras for the middle class and lots of goodies for the wealthy. But individuals making less than $20,000 and households making less than $40,000 a year will actually get less tax relief in 2011 than they got in 2010 and 2009.

That's because the Making Work Pay credit, a temporary tax credit that's been in effect for the past two years, is going away as of January 1. That credit provides up to $400 per individual, $800 per household, for all eligible workers. And it adds more to the pockets of households making between $20,000 and $40,000 than the new, 2-percent drop in the Social Security payroll tax.

Why is the payroll-tax cut not as beneficial to those workers? Because at lower income levels, a 2-percent decline doesn't add up to much.The Tax Policy Center, a non-profit, non-partisan research organization, estimates that 51 million households, including many making $40,000 or less, would do worse under the new law. (On the Tax Policy Center's table illustrating that point, see the fourth column from the right, in the row labeled "All," for the total number of households benefiting more from Making Work Pay than from the Social Security payroll tax cut; the number is in thousands, so add three zeros to it.)

With the Making Work Pay tax credit, individuals between $6,452 and $75,000, have been eligible for up to $400 a year. Couples making between $12,903 and $150,000 have recieved up to $800. But, as Roberton Williams, a senior fellow with the Tax Policy Center, points out, the 2-percent drop in the payroll tax doesn't yield $400 until a worker makes $20,000. So workers making less won't get as much under the new system.

To confirm the TPC's assertions, I checked with both Barbara Weltman, a tax attorney and author of J.K. Lasser's 1001 Deductions and Tax Breaks, and John W. Roth, a senior tax analyst with CCH Wolters Kluwer, publisher of tax information and software. Both agreed with the TPC's assertion. "The net will be a negative for the lower working class," Roth said.

To be sure, middle Americans will benefit from the new package. With a 35-percent tax on estates and a $5 million-per-person, $10-million-per-couple estate-tax exemption the law for the next two years, the wealthy will fare far better than they would have, had the estate-tax law reverted to its pre-Bush-tax-cut level or even to the level at which the estate tax stood in 2009.

But if Congress truly wanted to stimulate the economy with this package, it would have provided even more tax breaks to the poor, who spend every dollar of what they get, Williams noted. Middle- and upper-income workers could very well use the extra money in their paychecks to pay down debt and save, not to spend to prop up the economy. "We'll get more stimulus," Williams said. "But in terms of bang for the buck it's not as efficient."—Tobie Stanger

source:ConsumerReports