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The Democratic, Republican Tax Plans: Which Party Is Truly Fighting For The Middle Class?

Alex Blow |
October 25, 2012 | 8:58 p.m. PDT


Several protests have been held agitating for a fairer taxation policy that would help the U.S. recover financially. (Sunset Parkerpix, Creative Commons)
Several protests have been held agitating for a fairer taxation policy that would help the U.S. recover financially. (Sunset Parkerpix, Creative Commons)
With the presidential race reaching its final stretch, most of the public’s attention has shifted away from the most important crisis facing the United States economy: the fiscal cliff.

In short, the fiscal cliff refers to the $600 billion in automatic spending cuts and tax increases that are set to occur during fiscal year 2013. According to the Tax Policy Center in Washington, D.C., the expiration of the Bush Administration’s 2001 and 2003 tax cuts (formerly known as the EGTRRA and the JGTRRA) and the expiration of the tax credits of the 2009 stimulus package (formerly known as the ARRA) would lead to an increase in taxes for nearly 90 percent of the country.

While this automatic change to the nation’s fiscal framework would dramatically reduce budget deficits, the shock to the domestic economy would have disastrous effects. Last May, the Congressional Budget Office warned that the effects of going over the cliff would result in the onset of another recession during 2013. The severity of this situation cannot be overemphasized. It will require something out of Congress we have not seen in a long time: a compromise.

However, a compromise requires the merging of at least two reasonable plans, which, in this case, equals reducing the rise in taxes for the majority of Americans. Unfortunately for the American people, that requirement is lacking in fulfillment due to a standoff between the two main political parties.

Last July, the Tax Policy center analyzed the revenue effects of two particular pieces of legislation in the Senate: the “Middle Class Tax Cut Act” (the Democratic Proposal) and the “Tax Hike Prevention Act of 2012” (the Republican Proposal). These two proposals clearly reflect the priorities of each of the two parties. Both sides claim to be fighting for the middle class; however, the numbers reveal a disturbing reality.

The Democratic plan contains four main components. First, it extends all the current income tax rates except for the top individual rate. In other words, this plan allows the income tax rates to return to what they were under the Clinton Administration. Second, it allows the estate tax, gift tax and generational skipping transfer taxes to revert to their pre-2001 levels. Third, it extends all other provisions of the 2001, 2003 and 2009 tax cuts. Finally, it does not patch the Alternative Minimum Tax (AMT) for 2013. Both Democrats and Republicans have consistently patched the AMT in the past to prevent middle income families from being subject to higher rates.

The effects of this proposal were measured in two ways by the Tax Policy Center (TPC). One measured the effects of the proposal if the AMT and the estate tax provisions were extended and one did not; because the TPC states that it would be highly unlikely that the proposal would not extend the AMT or the Estate Tax Provisions, we shall only look at the effects of the former measurement.

Compared with the current policy in place, which shows how revenues will change from now, the bottom 90 percent of Americans saw no decrease in their after-tax income (no increase in taxes). In contrast, the top 10 percent of income earners saw a decrease in after-tax income of only 1.4 percent (roughly $35,233). However, the vast majority of that change falls within the 0.1 percent. In other words, the Democratic proposal ensures that not only middle and low income earners will see no increase in taxes, but that many high income earners will see none as well.

The Republican plan differs from the Democratic one in three main aspects. First, it extends all current tax rates, including the top rate of 35 percent. Second, it extends the Estate Tax, Gift Tax and Generational Skipping Transfer Tax Provisions. Third, and most importantly, it lets certain low income provisions of the 2009 Stimulus to expire. Specifically, the tax credits associated with the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC).

Compared with the current policy in place, the effects of the Republican proposal are the exact opposite of the Democratic proposal. Every single change in after-tax income falls within the bottom 95 percent of income earners, who will see a decrease in their after-tax income (a tax increase). Hardest hit are the bottom 20 percent of income earners, who will see an average after-tax decrease of 1.5 percent ($194). In contrast, the top 1 percent and 0.1 percent are the only income groups who see absolutely no tax increase.

While both our political parties adamantly claim to be fighting for the middle class, the numbers indicate that only one clearly is. Of the two plans, the Democratic plan is the only one that defends the tax provisions aimed at middle and lower income earners. Its Republican counterpart ensures that the top 1 percent is safe, while allowing the burden of tax increases, which they despise so much, to fall on everyone else, particularly the poorest among us. Recall that the Democrats were willing to compromise with the Republicans in 2010 and extend every part of the Bush tax cuts. Yet, even though we are weeks away from a fiscal nightmare, it appears that the Republican party is unable to do the same.

Republicans can continue to portray themselves as the protectors of the middle class (I certainly expect they will). However, the beautiful thing about numbers, as opposed to our current representatives, is that they do not lie.


Reach Contributor Alex Blow here.



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