Thread: Economics The Fiscal Cliff Approacheth
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Old 10-29-2012, 06:46 PM   #94
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How the fiscal cliff affects the poorest Americans
Posted by Suzy Khimm
on October 28, 2012 at 5:07 pm

The fiscal cliff hits the richest Americans harder than the poorest ones: If all of the tax changes happen on Dec. 31, the top 20 percent of Americans would see their effective tax rate rise about 5.8 percentage points on average, while the bottom 20 percent of Americans would see their tax rate rise about 3.7 percentage points, according to the Tax Policy Center That’s largely because of the Bush tax cuts to income, capital gains and the estate tax. But certain parts of the fiscal cliff have would have a much bigger impact on poor Americans than rich ones.

Both the Child Tax Credit and Earned Income Tax Credit were expanded under Obama’s 2009 stimulus to help lower-income Americans—and despite being scheduled to expire on Dec. 31, these extensions have seen less attention than other elements of the fiscal cliff.

The EITC was originally created to encourage poor Americans to work, and it’s been found to prove especially effective in increasing the employment of single mothers and decreasing welfare rolls. The 2009 stimulus raised the threshold of the credit phaseout from $3,000 to $5,000 and increased the wage subsidy from 40 percent to 45 percent for families with three or more children.

The Child Tax Credit was also expanded in 2009, building upon 2001 changes that doubled the tax credit to be as high as $1,000 per child under 17. Under the stimulus, if a family was eligible for a credit that was bigger than the taxes they owed, they received part of the balance for earnings above $3,000. (The threshold was previously $12,550.) As with the EITC, there’s a lot of research linking the Child Tax Credit to higher achievement and lower poverty rates.

While the 2001 changes overwhelmingly helped middle-income families, the 2009 expansion was targeted to help the bottom 20 percent of Americans, as the Tax Policy Center’s Elaine Maag explains in this chart:



Overall, if the tax breaks from the 2009 stimulus are allowed to expire—the EITC and Child Tax Credit expansions, along with American Opportunity Credit for college tuition—the poorest 20 percent of Americans would see their taxes go up by $209 on average, reducing their after-tax income by 1.9 percent, according to the Tax Policy Center. The top 40 percent of Americans, by contrast, would see see a mere 0.1 percent drop in after-tax income. And advocates for the poor are now worried that these provisions will fall by the wayside during the fight over the Bush tax cuts and their impact on the richest Americans.
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