One thing I don’t quite get has been the White House’s reluctance to highlight the non-infrastructure parts of the stimulus package. Oh sure, people wanted more investment in roads and trains and energy grids and all that good stuff – I did too, and thought the stimulus package spent an inadequate amount of money on them. But you’re left with the impression that the rest of the stimulus was just thrown down a well somewhere. In fact, it was not. The extension in unemployment benefits that the government provided under the stimulus, for instance, is turning out to be highly useful to a lot of people. I don’t necessarily expect the people receiving extended unemployment insurance to turn around and write Obama a thank-you note – but the White House might want to at least occasionally make the point it’s their initiative that is helping them to keep putting food on the table.
Likewise with the tax reductions in the stimulus – which collectively made up $288 billion, or about 37 percent of the package. Most of those tax cuts are targeted at individuals. And while the they aren’t terribly deep, they are impressively broad.
The broadest tax cut in the stimulus package is the “Making Work Pay” tax credit, worth about $116.2 billion (see the Urban Brookings Tax Policy Center for this and other figures) and applicable to the vast majority of working Americans. Indeed, all single filers making less than $95,000 and all joint filers making less than $190,000 are eligible for this tax cut. Most of them, in fact, are already receiving it in the form of lower withholding on their paychecks.
The well-to-do are benefiting too – or at least they will once it comes time to file their taxes next April. That’s because, as part of the stimulus, the government extended the alternative minimum tax (AMT) “patch”, which reduces the tax burden for some 24-26 million Americans who would be subject to the AMT. Most people who would be hit by the AMT are doing pretty well. The median income among people who would be subject to the AMT is about $130,000, and the average is about $165,000. This has the convenient property, though, of starting to kick in right where the “Making Work Pay” credit phases out, meaning that a great number of Americans who won't benefit from former program will benefit from the latter one.
Finally, there are a number of smaller tax rebates and credits that are more highly targeted – to buyers of new cars and new homes, to small businesses, to low-income families with children, to the unemployed, and so forth. We’ll focus principally on one of these, which is the credit for new car purchases.
But first – what do I mean by “working households”? By “households”, I mean simply tax filers. There were about 143 million individual or joint income tax returns filed in 2007, according to the IRS (this is the most recent year for which statistics are available). By “working” I mean that the taxpayer had some sort of taxable income, which was true of about 111 million of the 143 million returns.
This is different than saying that 95+ percent of all Americans will receive a tax cut. Barack Obama sometimes confused his language about this on the campaign trail. He was wrong when he did so. Illegal immigrants, some non-working individuals and families, some retirees, etc. will not be assisted by any of the tax cuts. It’s also somewhat ambiguous whether, say, a 7-year-old kid is considered as having had his taxes cut if his daddy is having less withheld from his paycheck.
But more often, Obama used phrases like “working taxpayers” or “working families” when referring to his tax cuts on the campaign trail. This is a promise that Obama has kept.
Let’s take a look at the tax cuts contained in the stimulus package in a little bit more detail. First is the Making Work Pay tax credit. As I mentioned, this applies to single filers making less than $95,000 and joint filers making less than $190,000. Using the IRS tax tables that I linked to earlier, this means that about 102 million taxpayers, or about 92.4 percent of “working” tax filers, will be eligible for the credit.
Then there’s the AMT reduction. The Tax Policy Center has helpfully estimated the percentage of Americans who are subject to the AMT by income bracket. For instance, about 79.2 percent of earners between $100,000 and $200,000 should be subject to the AMT by this time, according to estimates that the Tax Policy Center put together a couple of years ago. All told, this works out to about 24 million tax filers according to the estimates that I linked to above, or 26 million according to newer (but unfortunately much less detailed) estimates. If we perform this calculation for each income bracket based on the 24 million figure, this includes about 6.8 million tax filers who are not eligible for the Making Work Pay tax credit.
That leaves only about 1.6 million working tax filers who will not benefit from either the Making Work Pay credit or the AMT patch. And most of them are out of luck, since while there are a number of other tax cuts in the stimulus package, most of them phase outs at amounts equal to or lower than the threshold for Making Work Pay. One exception, however, is the deduction for the purchase of new vehicles, which doesn’t completely phase out until $135,000 for single filers and $260,000 for couples.
The automobile purchase credit operates by allowing taxpayers who buy new vehicles to deduct state and local sales taxes from the amount they owe to the IRS – something they ordinarily can’t do. The average new car purchased today costs about $25,000 before sales taxes, which at prevailing sales tax rates of about 5 percent, means that it comes with an additional $1,250 sales tax burden. Allowing people to make an “above the line” deduction on these sales taxes should reduce their tax burden by about 30 percent of $1,250, or $375. Since the total amount allocated to this tax credit is $1.7 billion, this implies that about 4.5 million people will benefit from it, or about 4.3 percent of the tax filers who are eligible for it.
What we’re concerned with, though, in evaluating the breadth of the tax cuts, are people who are eligible for the auto purchase credit but who weren’t eligible for Making Work Pay and who didn’t benefit from the AMT patch. This will be the fraction of individual filers making between $95,000 and $135,000 and joint filers making between $190,000 and $260,000 who were not subject to the AMT – a rather small number of people. We can probably assume, however, that participation rates will be higher in this group, since they’re making good money and are more likely to be able to afford a new car. Specifically, we’ll guess that the participation rate among this group will be 8.6 percent, twice the average of 4.3 percent. This works out to another 80,000 tax filers or so who had not been eligible for one of the other tax credits.
Adding everything up, I come up with about 98.6 percent of working tax filers – see upthread for how I caveated that description – who are eligible for one or more of these tax cuts. This is before accounting for any direct or indirect benefit from the various small business tax credits, or from oddball circumstances like when a high-income earner avoids the phase-out for the home purchase tax credit because they book it on their 2008 return.
(See here for a higher resolution version with a bit of additional detail.)
A recent Rasmussen poll found that just 15 percent of likely voters believed that "President Obama cut taxes for 95% of Americans". Technially, they're wrong -- Obama has not cut taxes for 95 percent of Americans. But he has done so for in excess of 98 pecent of "working" tax households. It's time for the White House to start taking a little credit for having done so.