Debate Rages About the Truth of the President’s ‘Middle Class Tax Cut’

While recently in Michigan, President Barack Obama boasted “within one month of me taking office, we signed into law the biggest middle-class tax cut in history, putting more money into your pockets.”

But some experts question not only the size of the tax cuts but also their effectiveness.

Obama was referring to the tax cuts in the American Recovery and Reinvestment Act, which was signed into law in February 2009.

Tad DeHaven, a budget analysis on federal issues with the Cato Institute, said about 35 percent of the federal stimulus was tax cuts.

“Among the tax provisions of the bill was a $400 per person ‘Making Work Pay’ tax credit, a patch of the Alternative Minimum Tax, numerous temporary breaks for businesses, an expansion of several tax credits, and a number of provisions to reduce taxation on public bonds. These weren’t ‘pro-growth’ tax cuts that effect long-term decision making. These were short-term Keynesian styled tax cuts,” DeHaven wrote in an email. “When a company or entrepreneur makes the decision to hire or invest, they do so based on long-term considerations. Businesses dislike uncertainty. Short-term tax cuts by their very nature create uncertainty (i.e., will congress extend it?). They can also create economic distortions. Think of the people who took that temporary $8,000 homebuyer’s tax credit. That induced people to make a short-term decision that might not have been in their best interest in the long-term. For example, if they don’t keep the house for a certain amount of time, the credit has to be paid back to the government.”

Anthony Randazzo, director of economic research for the Reason Foundation, said voting to extend the 2001 and 2003 tax cuts did more to let middle class families keep the money they earned than the $400 federal stimulus checks.

“Even if the tax cuts in the Recovery Act were the biggest ever for the middle class, the collective impact of the spending in that program adding to the national deficit and debt has put America into a fiscal position where it may be unavoidable to raise taxes even on the middle class — which is a record that should hardly be praised much less touted by the White House,” Randazzo wrote in an email. “Furthermore, if the president wants to discuss his record in the first month of his administration, the real story is that one of the first bills he signed was an effective tax increase on the middle class. The universal children's insurance fund, known as S-CHIP, raised taxes on cigarettes by 62 cents per pack — which is about the most regressive tax possible since more than half of smokers are classified by the government as ‘working poor’ and at least 25 percent of smokers live below the poverty line.”

Obama’s overall tax relief for middle-class Americans is not unprecedented, said another expert.

When Obama took office, the average income tax rate that applied to the median family was 5.94 percent, according to Antony Davies, an associate professor of economics at Duquesne University. That was cut to 3.54 percent under Obama. Later under Obama, the average income tax rate increased from 3.54 percent to 4.47 percent and then again to 4.68 percent. The drop from 5.94 percent to 4.68 percent is a 20 percent decline.

"That is not historic. Average tax rates on the middle class fell the same amount during Reagan’s presidency,” Davies wrote in an e-mail.

But Davies points out that the “marginal tax rate” has remained the same for median families under Obama. The marginal tax rate is the tax rate that applies to the “last dollar earned.” Income is taxed at an increasing rate the more someone earns, rising from 10 to 15 to as high as 35 percent.

 In contrast, from 1980 to 1987, the median family’s average tax rate fell 20 percent and the marginal tax rate also fell almost 40 percent, Davies said.

“This is consistent with what we’ve observed so far of the Obama presidency. He is big on handing out fish, but doesn’t want people to go fishing for themselves,” Davies wrote.