The New Tax Deal – Stand By For Gnashing of Teeth

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    The Tea Partiers likely believe there was some principled victory with the reduction in Social Security withholding: 2%! Well, that was in lieu of the Making Work Pay Credit and a whole lot of low-income earners will see decreased take-home pay to cover their increased tax bottom line.

    We are still paying income taxes, just lowering our Social Security withholding. No one can honestly answer how that will affect benefits down the road. After all, someday someone can always point to 2011 (and maybe beyond) to argue that lowered contributions equal diminished defined-benefits for participants. But I digress. We are still paying income taxes, but the Making Work Pay Credit is GONE (for now). It was significant, as you can see. Unless withholding is increased for couples earning less than $40,000 to offset the lost benefit of the credit, there will be a larger balance to pay at tax time come 17 April, 2012. Odd…that’s an election year.

    That is unless, as you see in the graph, you earn enough that the 2% will make up for the loss of the up to $400 credit for single taxpayers and $800 credit for those married filing jointly. In simple scenarios, single taxpayers break even from the loss of the credit once their wages and other earned income reach $20,000. Married couples filing jointly break even at $40,000. Assuming equal incomes, a married couple must make combined earnings of almost $150,000 to equal the offset benefit of the single filer who tops out at $2,136 at income of $106,800.  But couples are dividing that by two. Nevertheless, they potentially gain $4,272 once they earn an equally divided $213,600.

    Was this intended? The scenarios here are very simple and don’t account for the effects of the Earned Income Credit. That comes at the end of the tax year and not at payday. Nevertheless, the lowest earners may actually see a decrease in their take-home pay. Those with the lower propensity to spend receive the higher benefit. That won’t maximize any economic benefit at all. This is regressive now and it will be regressive down the road when Social Security receives a certain broadside. What’s worse is that the new Congress may act to double down by reinstating the Making Work Pay Credit when the Tea Party screams and they will demand a spending offset. See the downward spiral?

    Other bad tax news tomorrow.