Who Benefits Most in Tax Deal?

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Sorry, it’s not the middle class (Joshua Roberts/REUTERS)

There is something in the tax deal for everyone from the rich to the middle-class to the working poor to the unemployed to the retired. So who stands to benefit the most from the deal in 2011? It’s not the middle class. The problem is some of the benefits aimed at the middle class will put money in the wallets of the rich as well. Add that to the extension of the Bush tax cuts, and the rich are clearly the winners here. But it’s not by nearly as much as you might think. Who gets the biggest shaft in the deal? The retired.

In making the tax deal, Obama tried to balance the extension of the lower rates for the upper-upper income with some tax measures that should benefit the poor and the middle class and the unemployed. My colleagues over at Swampland say the reason Obama did the deal is that it while it benefits the rich, the middle class gets more:

But given those qualifications, the trade-off looks like this: President Obama gave up campaign promises worth $118 billion in exchange for middle class stimulus measures worth at least $206 billion. And the American people will go into debt another $324 billion or more to make it all happen, though some of that money may flow back to the Treasury in the form of increased economic performance down the road.

The problem with this analysis is that some of the benefits aimed at the middle class also go to the rich. Others go to the poor or the unemployed. Here’s how it all shakes out:

Just looking at 2011, all in, the tax deal is an easy win for the middle class for next year. Extending the Bush era tax cuts alone for those of us making less than $250,000 puts an additional $190 billion in the middle-class’ collective pocket. The extension of the alternative minimum tax credit at 2009 levels, according to the CBO, is another $66 billion windfall for next year for the middle class. But both those changes were likely to happen even without the current deal. Both Obama and the Republicans wanted them. So you really have to exclude them when considering the current deal.

Exclude income tax break and the AMT, and the middle class starts to look more like a loser in the Obama-Republican tax deal. For the rich, extending Bush-era lower income tax rates for those making over $250,000 puts an additional $67 billion in the pockets of the rich, according to the Congressional Budget Office. The rich also get a cut in the estate tax. Income below $5 million would be totally exempt. Above that estates would be taxed at 35%. That’s a big drop from what the estate tax was scheduled to become in 2011, which was a 55% tax on all estate income above $1 million. But again, Obama was already willing to deal on this one, and had proposed making the estate tax 45% on all income above $3.5 million. So in terms of a compromise, we are talking about a $21.5 billion gain for the rich in 2011, or at least their relatives. Then there is the social security tax benefit. Yes. While that cut is aimed at the middle class, the cut is on all income below $106,000. So the rich will benefit as well. They will get a break of roughly $27 billion. So add those items together and you get a gain of $115.5 billion for the rich.

How does that stack up to the middle class? I am defining a family income of $36,000 to $91,750 to be middle class. The middle class get a social security tax cut of 2%. Of that, the middle class will collect about $79 billion. The other tax breaks or credits in the bill that will amount to about $20 billion in 2011. But most are focused on the working poor. Though you could argue that a some portion of that goes to the middle class. Say $5 billion. Unemployment insurance, too, could be seen as a middle class benefit to the tune of $56 billion. But the extension we are talking about is for people who have been out of work for nearly two years. So even if many of those people were middle class when they lost their job. Most of those people are likely to be either now in the poor category or on their way to falling into the lower class. So lets credit another generous $15 billion of unemployment benefits to people who are still solidly in the middle class. Add that up and the deal amounts to a gain of $104 billion for the middle class, or $11 billion less than what the rich get.

The group that comes out the worst in the tax deal is the elderly and the retired. They get the benefit from maintaining the tax on investment income at 15% rather than raising it to 20% as Obama would have wanted. The rich will get some of the benefit from this tax break. So tack it on to their winning tab as well. But studies have shown that two thirds of the benefit from lower capital gain and dividend taxes goes to people over 66. So we are really talking about older people here. But the benefit is relatively modest for this group in 2022. The CBO estimates that maintaining the 15% rate on investment income only creates a gain of $5 billion in 2011 for those that benefit. The benefit of the lower capital gains tax is more impressive in 2012, when it will boost retirees income by $16 billion. And this in unfortunate. In terms of stimulus, it would have been smarter to direct more money to the retired. They tend to spend most of the income they get.

So its the rich, though not by a landslide. But that’s just 2011. For 2012, the deal that Obama struck gets even better for the rich. They still get their upper income tax cuts, but the social security payroll tax and the unemployment benefits expire. As the saying goes, the rich get, well, better tax treatment.