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Obama’s effort to extend tax cuts erases ‘middle class’ money worry

Updated: May 3, 2013 12:15PM

By challenging Congress to extend the cuts that almost all agree upon, President Barack Obama made not only a positive economic move, but he took a position that must be popular to most thinking Americans who are worried that automatic tax increases and spending cuts scheduled to take place at year-end will send the economy over the proverbial cliff. No one wants another congressional standoff.

The president estimated his plan would save the middle class from an estimated $2,200 tax increase. Other estimates range from $1,300 to $1,500 for the typical family. If Congress doesn’t act to extend the current rates:

† A two-income household of $205,000 would pay $3,900 more.

† A two-income household of $140,000 would pay $2,800 more.

† A single person with an income of $65,000 would pay $1,300 more.

He gave the American people what they want: relief from certain higher taxes and relief from at least one huge congressional impasse. And his appealing proposal would wipe out all leverage the Republicans have in Congress to get the administration to leave taxes for the “wealthy” unchanged, along with the middle class.

It was a masterful stroke of politics — and economics.

But will it work? Let’s take a look at some of the issues that will affect you — the American middle class — who will most benefit from the extension of tax cuts:

Who is ‘middle class’?

Even some Democrats wanted to increase the extension of tax cuts to those with incomes nearing $1 million. Middle class is all a matter of perspective. Obama said the tax cuts would affect the “98 percent of Americans, who earn less than $250,000.” Well, 98 percent of Americans are not middle class. In fact, 42 percent don’t pay any taxes, instead receiving benefits from the government. And the 98 percent cited by the president pay barely half of all the income taxes collected by the government.

His proposal nets a lot of voters, but not a lot of tax giveaway. To really have an impact and create economic growth, the proposal would have to be extended to those in the top 2 percent of wage earners — those over $250,000 — who pay 45.65 percent of all personal income taxes.

Will this help the economy?

Not increasing taxes on the middle class certainly will take away a blow that threatened our economy next year by removing the automatic tax increases.

But will it help? We’ve had basically the same income tax rates since the Bush tax cuts of 2001 and 2003. The tax cuts Obama took credit for in his speech were the payroll (Social Security) tax and the stimulus plan. They haven’t worked yet.

The president said agreement on keeping tax rates unchanged will give Americans the security and confidence needed to get the economy going.

But most middle-class Americans don’t have the flexibility to make future spending plans around tax rates. They just react to changes in tax rates and gasoline prices as they directly impact their family budget.

If taxes do increase next year, you can count on a slowdown in consumer spending — and the economy.

How is today different?

The president correctly made the case that the economy boomed in the Clinton years, when rates were higher for everyone. The budget was in surplus and the unemployment rate was so low that economists publicly worried about “running out of labor.” But times are really different now. When President Bill Clinton increased taxes, the impact was offset by a huge “productivity dividend” created by the technology revolution. Today we’re in a global slowdown — not a good time to raise taxes on anyone.

Bottom Line: The president has it directionally right. Tax cuts are always a good idea when an economy is struggling. But in order to get the benefits, you have to cut taxes the most on people who pay the most. It’s not a political concept; nor is it a matter of fairness. It’s an economic issue.

And that’s the Savage Truth.

Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist and a registered investment adviser. Post personal- finance questions at and blogs.suntimes/savage.

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