Following a suspenseful 51-48 vote this afternoon, the United States Senate succeeded in passing legislation proposed by Majority Leader Harry Reid that extends for one year Bush-era income and investment tax breaks for low- and middle-income families with incomes less than $250,000 per year originally set to expire on December 31, 2012, while allowing estate taxes to rise slightly, and tax breaks on income over $250,000 per year to expire after that date. By allowing the expiration of tax breaks on income above this threshold, the legislation also raises almost $800 billion in revenues badly needed for supporting critical public investments like education, infrastructure, and the future solvency of Medicare.
Also contained in the legislation were extensions of key income security provisions signed into law by President Obama, including enhanced Child Tax Credits worth more $800 per family for almost 9 million working families, increased Earned Income Tax Credits that offset $500 in payroll taxes paid by 6.5 million working families, and the American Opportunity Credit, which assists millions of American college students. Taken together, these tax cuts will assist more than 13 million working-poor and near-poor families (including nearly 26 million children) in 2013.
Despite the positive economic effects of putting money in the hands of those low- and middle-income families most likely to spend it, a minority of senators raised concerns about the economic impact of tax-break expirations on incomes above $250,000, claiming that this would “hurt job creators.” Fortunately, these concerns are overblown. First, people earning more than $250,000 still receive the same tax break everyone else does on every dollar of income up to this $250,000 threshold, and for every dollar someone earns over this threshold, their tax rate increases from 35% to 39.6%–hardly an impediment to hiring given the spectacular growth in wages by these earners over the last ten years.
Secondly, the overwhelming majority of individuals earning more than a quarter million dollars per year are not small business “job creators”—in fact, only 8% of all business owners filing through the Personal Income Tax (and thus affected by the tax increase) have incomes over $200,000, and of these only 2.5% of businesses in the United States have actual employees and would be affected. In other words, there are just not that many of them, and they do not employ very many people. In other words, the overwhelming majority of people affected by the expiration of these tax breaks aren’t “job creators.”
As a result, the negative economic consequences of eliminating these tax breaks should be minimal and far outweighed by the positive effects of putting more money in the hands of the low- and middle-income people who will spend it.
In passing these tax cuts, the US Senate took an important step forward in ensuring in fiscal responsibility and stronger, more equitable economic growth.