Does the Middle Class Need Tax Cuts?

To extend tax cuts across the board for two years, as this plan proposes, we would add more than $500 billion to the national deficit in lost tax revenue. What would we get for this money? Not much, it turns out.

For starters, the effect on unemployment would be negligible. The Congressional Budget Office estimates that extending the tax cuts for just the middle class would only reduce the unemployment rate between 0.1% and 0.3% next year, and the effect if tax cuts are extended for wealthy Americans would do little more.

Meanwhile, the average American would not feel their wallets fatten up too much either.

The average American household earns just more than $52,000 a year, based on the most recent data from the U.S. Census Bureau, and according to the Tax Policy Center (run by the Urban Institute and Brookings Institution), these households would save an average of $1,180 in 2011 if the tax cuts are extended.

Obviously, $1,180 is nothing to sneeze at. For this amount of money, a family could pay for a year’s worth of cable or cell phone bills, get a roundtrip plane ticket to most destinations in Europe or pay for two months’ rent in most parts of the country (or about one month’s rent if you happen to live in, say, San Francisco or New York City.) But how much would you notice the difference from paycheck to paycheck? Distributed over 12 months, the tax cuts would yield only $98.33 in monthly savings for the average household.

By comparison, households earning $200,000-$500,000 would save nearly $7,500 in 2011, and those earning $1 million or more would save exponentially more, about $129,000. If that seems a bit uneven, that’s because it is. According to the Tax Policy Center, households in the $50,000-$75,000 income bracket will see after-tax savings increase by an average of 2.3% of their income, while households earning $1 million or more will see nearly triple the savings, or about 6.2%.

So what’s more important to you: saving about $1,000 a year on your paycheck while the rich save more than $100,000 or cutting hundreds of billions of dollars from our deficit to improve the long-term economic outlook of our country?

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.