What The Obama Tax Deal Means For You

No doubt you've heard that at the beginning of December, President Obama reached an agreement with the republicans in Congress to pass a new tax cut bill.

What you may not be sure of is exactly what this bill means for you. Let's take a look at what's involved. 

The primary reason for the deal is that republicans in the Senate have been filibustering everything that democrats bring to the floor. In particular, the compromise contains two elements that democrats have been struggling to pass.

First off is extended unemployment benefits. Contrary to what you may have heard, unemployment is not a hand-out; it's an insurance program. If you are employed, then you (through your employer) pay unemployment tax. If you become unemployed through no fault of your own and are unable to find another job, you get a weekly benefit based on your previous salary. If you stop looking for work, the payments stop.

Normally, unemployment lasts for a maximum of 26 weeks, but due to the depth of the current recession, it has been extended to last for as long as 99 weeks. Last summer, many people temporarily lost benefits when that extension expired and the republican party briefly filibustered the renewal; this month, millions of people who have past the 26-week cap will be losing benefits (and likely their homes), as the majority in favor of extending benefits cannot muster up the required 60 votes to defeat the republican filibuster. Approximately 800,000 people have already been notified that their benefits will no longer be paid, and that number will reach about two million at the end of December.

The other main issue is tax cuts. The democrats favor extending the Bush tax cuts on earnings up to $200,000, or $250,000 for families. The way that our tax system works, that means that everyone (including the rich) gets lower taxes on all of their income up to that cap, so this benefits people who make at least $250k the most (in absolute dollar values) but helps everyone who pays income tax. Republicans think this is a good idea as well, but refuse to let it pass unless Congress also passes an extension of the tax cuts for income over $250k, so while almost all senators want to extend the so-called middle class tax cuts, there are again insufficient votes to overcome the filibuster.

If Congress passes the deal that President Obama reached with republican leaders, it will have the follow effects, at the cost of approximately a trillion dollars in deficit spending.

First off, and most important to democrats, the bill would extend unemployment benefits for another 13 months. Aside from keeping literally millions of  people from becoming homeless, this is believed to have a large stimulative effect, as people living off of unemployment spend the money immediately on basic necessities.

It also extends all of the Bush tax cuts for another two years, setting the stage for another fight before the 2012 elections.

While these are the flashiest parts of it, there are a number of other tax changes as well. Republicans were able to kill the Making Work Pay credit, which encourages people to work by reducing taxes owed by 8% of income to a maximum of $400 ($5,000 in income). Instead, the payroll tax is being reduced by two percentage points for next year, which means a lower credit for those making under $20k, but more savings for the approximately 2/3 of American workers who earn more than $20k. However, if you work for the government and pay into a state retirement plan rather than social security, you lose the Making Work Pay credit without gaining anything from the reduction in the payroll tax.

Another annoyance to democrats comes in the changes to the estate tax. Under the 2001 Bush tax cuts, it was reduced every year until 2010, when it went away completely; this year, the government lost out on billions of dollars when large estates went completely untaxed. Absent action, on Jan 1st it returns to 2001 levels: 55% on all amounts over $1 million.  The deal would change that cap to $5 million ($10 million for couples) and lower the tax rate to 35%.

The plan also extends tax incentives for renewable energy and green jobs.