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Tax Changes On The Way

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By EDMUND L. ANDREWS

New York Times News Service

Published: February 15, 2009

WASHINGTON - At least for the next year or so, nearly every household with an income below $500,000 is likely to get at least a tiny tax cut.

But as President Barack Obama and Congress wrestle with an economic crisis and the legacy of the Bush tax cuts, the most far-reaching changes are not in how much people pay the government but in how much the government pays to people near the bottom.

Having criticized President George W. Bush for years about showering the wealthiest Americans with tax breaks, Obama and Democratic leaders are using a seemingly obscure concept - the refundable tax credit - to put money directly into the hands of people at the middle and bottom rungs of the income ladder.

The idea, not itself new, is to offer credits that can leave people with extra money even if they didn't earn enough to owe federal income taxes. About 57 million Americans have no tax liability.
Republican lawmakers generally have opposed refundable tax credits, arguing that people should not receive tax refunds if they do not pay income taxes. To Republicans, the credits look like a backdoor way of expanding welfare. Democrats see it as a way to shift income from the rich to the poor directly through the tax system.

More than a year before he was elected president, Obama laid out a plan aimed at shifting more of the tax burden from middle-income families to those at the top.

His plan called for reversing the Bush tax cuts for families with incomes of more than $200,000.

That is still part of Obama's blueprint, but the deepening recession and soaring unemployment rate have made the administration nervous about raising taxes on anyone.

But the crisis has, if anything, accelerated the introduction of the other part of his agenda: new and expanded tax breaks that get money to people who do not earn enough to owe federal income tax. (They do pay Social Security and Medicare payroll taxes.)

Several of Obama's biggest tax proposals have been rolled into the giant economic stimulus bill zooming toward an Obama signature. And while the legislation would authorize the tax cuts for only two years, Congress historically has extended temporary tax cuts for many years.

Under the stimulus plan, almost all taxpayers would have at least slightly lower taxes. People at the top of the income ladder probably would get a temporary reprieve from tax increases. But once the economy recovers, Obama will face huge new fiscal headaches that will make it hard to avoid broad tax increases - and not just on the rich.

The Congressional Budget Office warned in December that the budget deficit for this year would skyrocket to $1.2 trillion, a record both in dollars and as a percentage of gross domestic product. That estimate does not include the stimulus bill, which adds at least $400 billion to the deficit in 2009 and 2010.

Despite the budgetary chaos, Obama administration officials and Democratic leaders in Congress say they are determined to increase fairness by shifting more of the tax burden from middle-income families to the wealthy.

Obama's plan would lead to deep changes at all income levels. Because of the complexity of the tax code, there would be winners and losers at almost every level. In general, the biggest reductions in effective tax rates would be at the bottom of the income scale.

Overall, the Tax Policy Center estimated, about 80 percent of taxpayers receive a tax cut under Obama's proposal, and 10 percent see their taxes go up.

According to the Tax Policy Center, people near the bottom, with incomes of $10,000 to $20,000, would see their after-tax incomes rise by an average of 7.1 percent, or $1,019. For people earning $50,000 to $75,000, after-tax incomes would rise 6 percent, or an average of $1,201. Surprisingly, after-tax income would edge up even for many people with incomes of $200,000 to $500,000.

But tax bills would climb for people at the highest income levels. People in the top 5 percent of income, starting at $237,000, would see their tax rates rise 1.5 percentage points, to 26.5 percent, for an average increase of $5,686. People in the top 1 percent, with incomes above $619,561, would see their rates increase 5.7 percentage points, to 34 percent. Their average tax bill would climb $114,238.

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