Tim Geithner led an Administration effort yesterday to publicize in glowing terms the tax cut deal passed by Congress and signed by the President during the lame duck session in December. Concurrently, they sent out a fact sheet with some similar statistics that Geithner described in a press briefing. He claims that 159 million workers will benefit from the payroll tax cut, and there’s no reason to doubt him on that point. But the analysis suffers from a major sin of omission.
Geithner said that the payroll tax cut, totaling about $110 billion according to new estimates, will lead to an increase in take-home pay for the average worker by about $700 a year, and for the average working family about $1,000 a year. It’s important for him to use those numbers, because they are greater than the $400 per individual, $800 per family Making Work Pay tax cut which this payroll tax cut essentially replaces for 2011. The difference comes in how those taxes get calculated and where they phase out.
Making Work Pay was a flat $400 for every worker, but the benefit phased out for workers making over roughly $95,000 a year. That meant it was targeted directly to people who would spend it and offered a pretty nice benefit. By contrast, the payroll tax cut applies to every worker in America, as Geithner says. Bill Gates will get a payroll tax cut. Alex Rodriguez will get a payroll tax cut. Paris Hilton will get a payroll tax cut. Because the payroll tax itself caps out currently at $106,800, the tax cut for Gates, Rodriguez, Hilton and anyone else making that number is $2,136. But that’s $2,136 more than they got under Making Work Pay. I’ll leave it toy you to determine whether that’s something they need, and something which will work to stimulate the economy.
By contrast, at the low end of the scale, the “benefit” from the payroll tax cut ends up worse than the benefit from Making Work Pay. Making Work Pay was a flat benefit of $400; with the payroll tax cut it’s a percentage of income. So any individual making under $20,000 a year or family making under $40,000 a year will see less of a benefit under the payroll tax cut. That comes out to roughly 50 million workers, or close to 1 in 3, using Geithner’s numbers.
So you have this crazy circumstance where the payroll tax cut ends up a worse deal for low-income workers, who would spend the money, and a better deal for high-income workers, who probably won’t.
It’s true that the payroll tax cut comes out to $110 billion in tax relief for 2011, roughly $50 million more than Making Work Pay on an annual basis. But it’s woefully targeted. And the phony use of “average tax cut” promulgated by Geithner belies the fact that it’s a worse deal for 1 in 3 workers. Similarly, all the examples on the fact sheet are careful to use people making over $20,000 a year, to avoid the embarrassment of admitting that the deal raised taxes for those under that threshold.
I’m sure Geithner and the Administration would reply that it’s unfair to compare the payroll tax cut with Making Work Pay, because Making Work Pay was expiring. Well, so were the Bush tax cuts. And yet they were characterized as needing to be extended to avoid a tax increase. Under their own logic, the payroll tax cut effectuated a tax increase for 50 million workers.
What’s more, I’m sure the White House would look toward all the other wonderful provisions in the deal. Most of them, they’d have to admit, extend current law from 2010 into 2011 and 2012. Geithner was sure to mention the bonus depreciation for new capital investment, which gets accelerated in the bill from current law. But that’s a very lonely provision that represents something different from 2010, a time of sluggish growth.
The Administration and leading economists are sticking to their predictions that the economy will grow 3-4% in 2011, and that this package, in the words of Geithner, will add at least 1.5 million jobs. So far, economic indicators are decidedly mixed on that front. But I wish they would acknowledge all the facts of the payroll tax cut part of the deal, which is a raw one for the working poor.