News Story

The Obama ... Tax Cut?

The New York Times claims that President Barack Obama has done the "tax cut nobody heard of."  The story states Obama cut American's income taxes by $116 billion through the stimulus bill.

Anthony Randazzo, director of economic research for the Reason Foundation, gave his thoughts on the story:

There is partial truth to the story. What the ARRA included was a tax credit (different from a tax cut) of $400 for individuals and $800 for couples (phased out at $75,000 and $150,000 earned). This credit was commonly known as "making work pay," which was a signature promise of the Obama campaign. A credit is different from a cut in that it is cash given to you by the IRS, as opposed to a reduction in what you owe. 

The NY Times article incorrectly characterizes the Making Work Pay credit as a tax cut similar to the reduction in tax rates passed in 2001 and 2003. The former was a specific dollar amount given to taxpayers, even if they didn't pay $400 or $800 in taxes. The later was a reduction in the rates for each tax bracket, creating a lower baseline for what the IRS was taking each year.

However, the confusion is understandable in that the default option for the credit wasn't offered as a lump sum, much like the Bush tax credit of 2008. Instead, the default was to change people's withholding preferences on their W-4. So the credit was given in 12 month or 24 bi-monthly installments. However, if taxpayers wanted, they could receive the check as a lump sum, especially if they were already requesting $0 withholding (as I do).

The Making Work Pay credit will expire next year, true. But it's a redistributive credit that is not in line with the principles of sound fiscal tax policy. Just because withholdings were changed doesn't mean taxes were cut. The credit was still a direct redirection of wealth from taxpayers who pay taxes to taxpayers who don't contribute to the tax base. It may sound like semantics, but the negative effect of spending on the credit is very real in the aggregate.