11/29/2010

Your Paycheck is About to Shrink....

In the article, "Your Paycheck Is About To Shrink,"  Blake Ellis reminds us of a tax credit that will expire on January 1, 2011 unless it is renewed.  The Making Work Pay tax credit has saved between $400 and $800 dollars a year for single or persons filing jointly.  This tax credit has been in place for the past two years and has been forgotten or at least not top-of-mind for most Americans.  The author states that it has been ignored because of the focus on keeping the high wage earner portion of the Bush tax cuts from being renewed.  However, the author points out that 90 percent of Americans have been the beneficiary of the Making Work Pay tax credit and many are not in the position financially to have their paychecks increase. 

Ellis does explain that if the tax is not renewed it would cut the cost of government by $60 billion dollars.  However, Ellis points out that the same $60 billion dollars could be used in spending to generate jobs and strengthen business. 

I believe Ellis is right is his view that the $60 billion dollars would be put to better use in spending and not in government cost reduction.  A negative change in income will shift the entire demand curve to the left.  Because the tax credit is affecting people at all income levels except the top 10%, all levels of purchasing will be affected.  Also, a change in income on the demand curve is very different from a change in the price of goods.  A change in the demand curve by income is much more elastic than the change in price.  I hope more people learn of this 'forgotten' tax credit and our representatives can get it renewed.

5 comments:

Vladimir said...

I don't know whether or not this stop in the middle class tax cut is going to be noticed by most middle-class Americans. If this little tax cut that amounts to less than $30 a month is such a big deal, then one should re-evaluate spending habits and work a little harder.
I don't mind giving back a little more in taxes to fix our infrastructure and other problems our country has. I feel both the rich and middle class need to willingly give back to improve our situation.
It will be interesting to see both political parties respond to this tax cut. Republicans will push not to renew the tax cut in order to better balance the budgets. Democrats will argue that the middle class is once again being taken advantage of by the rich. My guess is that the tax cut will not be renewed.

Rex said...

This in an interesting topic that is highly debateable. I feel that it's a control issue. The money will be spent regardless of whether its done by the government or by the individual. The only reason not to extend it is to increase government control. However, the inneficiency of government will likely make the same dollar not go as far.

Dave said...

-1 on Rex for spelling.

Oy ... where to begin.

ALS22's post is OK, but it has a lot of mimicking of the opinions of the source (I know ... part of writing is always doing that).

In this case, think about the language.

How does the expiration of a tax preference "cost" the government? It isn't their money to begin with.

How is it that the $60B will generate jobs and strengthen business if it is spent by the government, but not if it is spent by you and I? Rex caught this too.

Vladimir follows a similar path in the comments. How is it possible that infrastructure repairs are underfunded when government has gotten significantly larger in our lifetimes? Either the infrastructure thing is a fib, or they're just not choosing to spend money on it. In the latter case, combining that with a desire to let the tax credit expire to provide the funds is an example of the hold-up problem from one of the later chapters in the text (sorry I don't have it with me to give you the right chapter number).

These kind of talking points are really common in the media. In an ideal world, economics classes disabuse you of them.

As to the opinion coming straight from ALS22, I don't think it holds water that elasticities with respect to income are higher than those for price - big ... certainly for some goods ... but not for most.

Jessica said...

My opinion-

Government is way too big. It's spending way too much. The more we allow Washington to take more and more of our money through taxes, the less and less efficient the monstrosity becomes. We need to get serious about cutting the size of government, reducing entitlements (no, welfare recipients should not be furnished cellphones with tax dollars), and shifting as much of the spending as possible to lower levels of government, where accountability and traceability is usually greater. We need to shift the paradigm shared by most of the American public that government can solve things. Most problems the government takes on only grow in complexity and waste.

Did I mention humble? Just my humble opinion...

Dr. Tufte said...

-1 on Jessica for poor sentence construction and/or grammar. Waived because we're in Block 1.

I will give credit for this comment this time, but this is the sort of thing I'd like to steer the class away from.

I'm OK with the opinion, but how does it relate back to Managerial Economics? I don't think Vladimir or Rex's comments from last year are that great either ... but because it was the end of the semester there wasn't much point in posting a warning like this since blogging was done for the semester.