Mar 1 2013

‘Sparing’ the 98 Percent–by Taxing Them

Media fumble impact of 'fiscal cliff' deal

NBC's Kelly O'DonnellWhen congressional Republicans and the White House agreed to their long- awaited “fiscal cliff” tax deal early on January 1, the news media celebrated it as a compromise that raised taxes on the rich while protecting everyone else.

As NBC News’ Kelly O’Donnell (12/31/12) put it, negotiators had crafted “a genuine compromise on taxes [where] rates would go up for couples earning above $450,000 a year and stay the same for everyone else.” Echoed Nightline’s Terry Moran (ABC, 1/1/13): “This late compromise, it will prevent many of the dreaded effects of the cliff. Only the top 2 percent of Americans are going to see a tax increase, sparing the other 98 percent.”

Newspapers offered similar reports on  “a tentative agreement to allow tax rates to rise on affluent Americans” (New York Times, 1/1/13); “a deal that keeps most people from paying higher taxes” (Washington Post, 12/31/12).

It was an uplifting story of how compromise could balance the budget while protecting the non-wealthy. Unfortunately, none of it was true. The deal struck in the wee hours of New Year’s Day actually created a large, permanent tax break for the rich, while saddling middle- and working-class taxpayers with a substantial tax hike.

The key compromise concerned the income tax cuts introduced by George W. Bush in 2001 and 2003, which had been set to expire at the end of December. Obama had campaigned on a promise to repeal these cuts on income over $200,000 a year for individuals ($250,000 a year for couples); as the deadline neared, through, he agreed to raise the threshold to $400,000 a year ($450,000 for couples). Income above that level would again be taxed at the 39.6 percent rate that was in place in the 1990s; income beneath that level would now permanently remain at the lower 35 percent level. This was commonly described as a minor redefinition of who was considered rich—as CNN White House correspondent Jessica Yellin put it (12/31/12), “Taxes would go back to the Clinton levels for people who make $400,000 a year, or households that make $450,000 a year.”

A restoration of the 39.6 percent income tax bracket above $400,000, though, is not at all the same as a hike in income tax payments by anyone earning that amount. That’s because for anyone earning that amount or more, they’ll still be getting the benefit of the Bush tax cuts for every dollar they earn from $200,000 to $400,000. And that, it turns out, amounts to a huge swing in taxes paid, and not just for the mere hundred-thousand-aires. The day after the deal was struck, Citizens for Tax Justice issued a chart (1/1/13) showing that as a result of Obama’s agreement to raise the tax cut threshold, the top 1 percent of earners would pay an average of $17,840 less on their taxes than if all tax cuts had been allowed to expire—more than 20 times the tax savings that the middle fifth of Americans would see, and 66 times that of the poorest fifth.

At the same time the very richest Americans were getting this unexpected tax rebate, another tax cut was being repealed that would disproportionately hit everyone else. This was the 2 percent payroll tax cut—another temporary cut, this one introduced by Obama in 2009 as a stimulus measure, whose repeal, numerous outlets had warned, would present one of the most immediate effects of the fiscal cliff, diminishing GDP growth by 0.6 percent (Slate, 11/14/12).

As the new year neared, though, Obama and congressional Democrats backed off from seeking to extend the payroll tax cut, and it quickly dropped off the news radar. The day before the cliff deadline, the pending expiration earned a brief note in the New York Times Business section (12/31/12), which called it a likely “significant drag on the economy”; in the Times’ news coverage on page one, though, payroll taxes went entirely unmentioned.

The payroll tax cut expiration, though, was hardly a minor tweak to the tax code. The total tax hike from raising the payroll tax for 2013, according to CTJ’s Steve Wamhoff, was $120 billion; the amount lost in income taxes on high-income earners by raising the tax threshold, meanwhile, was projected at $139 billion over the next decade—meaning the tradeoff effectively shifted a massive tax burden from the rich to all other working Americans.

In fact, the Center for Economic Policy Research found (Progressive Change Campaign Committee, 12/31/12) that while anyone earning under $113,700 (the maximum income subject to the payroll tax) would be hit with a 2 percent hike in total taxes, a large chunk of the wealthy would see lower rises—as little as 0.6 percent for those earning $400,000 (who would get the full benefit of the Bush tax rates while only paying higher payroll taxes on their first $113,700 of income). Even earners making $600,000 a year will see their tax rates rise by less than the bottom 98 percent.

Income Tax Changes Chart

Some did get it partly right, eventually. The morning after the fiscal cliff deal, NBC’s O’Donnell (Today, 1/1/13) wrongly declared that “most people’s taxes will stay the same and income rates will go up for only the highest earners at $450,000 and above.” But that night on NBC Nightly News, while she still insisted that “middle-class families keep their current tax rates,” O’Donnell noted that “the payroll Social Security tax goes back up 2 percent, costing about $1,000 a year for an average worker.” And by the following night, NBC correspondent Tom Costello (1/2/13) reported that “regardless of your income, your taxes are sure to rise in 2013”—thanks to the expiring payroll tax cut.

Anyone reading the Washington Post (1/1/13) the day after the deal, meanwhile, was confronted with a front-page story that noted in its second paragraph that “many 
Americans will see a higher tax bill because of the expiration of the payroll tax cut,” but then did an about face and insisted that the deal “would extend lower tax rates for families earning less than $450,000” while “higher-income earners would face steeper income taxes.” Yet this is an apples-and-oranges comparison: Income tax rates on the non-rich are only “lower” compared to Clinton-era rates, while high-income earners’ rates will be “steeper” compared to Bush-era rates. The rich will all see lower overall rates than they paid under Clinton, thanks to the cut in taxes on their first $400,000 in income.

The New York Times (1/5/13) reported that “the country’s top earners now face a heavier tax burden than at any time since Jimmy Carter was president.” In fact, tax rates are much lower on the wealthy now than under Carter or even Ronald Reagan’s first term (when the top tax rate was 50 percent), though they will now pay a higher share of taxes, thanks to the Earned Income Tax Credit and other tax reductions for the poor.

On CNN (12/31/12), Wolf Blitzer seemed especially hostile to the notion that increased payroll taxes should be counted as an increase in taxes. When Sen. Jeff Merkley (D.-Ore.) complained that “we’re going to see a 2 percent raise for those who were at the bottom and a fraction of a percent for those who are at the top,” Blitzer replied that the payroll tax “was always just a one-year stimulus,” and “the president wasn’t even pushing to extend it.”

Actually, the payroll tax holiday was in place for two years. But who notices a tax that mostly affects the bottom 98 percent?