<b>Incite:</b> Liberal foes of tax plan threaten middle class

What’s more important to Democrats — preventing appalling giveaways to the wealthy or protecting brilliantly successful programs aimed at the lower-middle class?

Unfortunately, it looks like the former. This is the critical week. If House Democrats scotch the tax-cut deal because of their understandable unhappiness over the extension of the Bush tax cuts for married couples making more than $250,000 and the slashing of the estate tax, they risk hurting their core constituency — and in ways beyond what President Barack Obama (with former President Bill Clinton as his megaphone) are highlighting.

The problem isn’t just that 98 percent of Americans would have their taxes raised on Jan. 1, and that 7 million jobless workers would lose their unemployment insurance. (That lost income would cost the economy about 600,000 jobs, according to the Council of Economic Advisers). It goes beyond the potential loss of a 30 percent cut in payroll taxes for the middle-class — a stealth stimulus that should have been undertaken two years ago. If this month’s deal collapses, those elements would probably get dealt with in early 2011.

No, the bigger problem is that the new Congress would almost certainly let what’s known as the refundables slip through the cracks. Obama knows this. I learned last week that he told Vice President Joe Biden (his lead negotiator with Senate Minority Leader Mitch McConnell) to pass the word that he would reject any deal that didn’t include them.

Washington Refunds

A refundable is Washington-speak for a tax credit that doesn’t just reduce tax liability, it actually goes into the pockets of middle- and lower-middle-class taxpayers in the form of refunds. The American Opportunity Tax Credit, for instance, is an Obama program worth as much as $2,500 a year for tuition. The compromise extends the program from the Recovery Act. If the compromise fails, millions of students won’t be able to go to college.

The oldest and most significant refundable is the EITC. Any time a commentator is tempted to utter the words “earned income tax credit,” he fears the audience will fall asleep somewhere between “income” and “credit”. So only the bravest — or those with multiyear TV deals that let them be complex for a time on television — would dare mention this longstanding anti- poverty program on the air. The result is that a critical part of the tax-cut compromise has barely been covered at all.

Helping Pay Bills

The EITC is a roughly $50 billion federal program that helps more than 25 million working Americans pay the bills. A family with two children, for instance, that earns less than $40,000 a year is eligible for up to $5,000 back. The program’s outlays far exceed welfare, now known as Temporary Assistance for Needy Families. In fact, the 1996 welfare reform bill succeeded largely because the EITC incentivized the poor to work instead of sit home collecting a check. It’s about the same size as the food-stamp program, though not nearly as well known.

Together, they have dented poverty more than any laws since the enactment of Medicare and Medicaid in 1965.

If President Clinton could have found a catchier name for the EITC, which he expanded greatly as president, he’d get more credit for his accomplishments. (Yes, this was a problem for that president, too). The name Rahm Emanuel suggested when he was in Congress was the “Ronald Reagan Tax Credit,” after the president who first put real money into it in the 1986 Tax Reform Act. (Actually, former Democratic Senator Bill Bradley was responsible for getting the EITC expansion in that year’s tax bill.)

Emanuel figured that the name change would build bipartisan support, but House Republicans were unamused and they rejected the effort.

Seeking Applicants

The low visibility of the program has consequences. As many as 7 million households are eligible and don’t know it. But enrolling is easier than for food stamps or welfare. Tax preparers simply attach a one-page form to tax returns. Not surprisingly, a brisk business in so-called refund anticipation loans has sprung up among tax preparers.

As part of the Recovery Act, Obama eliminated a marriage penalty in the EITC that had long made it cheaper for couples to file their taxes separately. This made the EITC consistent with the broader tax code (where the marriage penalty had been axed in 2001) and with the president’s efforts to strengthen marriage, a precarious enough institution in the communities most served by the EITC. The Recovery Act also expanded the refund to include married couples with three kids (it had been capped at two), a change that’s worth about $1,600 a year to such couples.

‘Toxic’ Provisions

This is real money for a struggling family, and money the Republicans initially rejected in this month’s negotiations. They don’t view tax credits as genuine tax cuts (a compliment they reserve only for cuts in marginal rates). McConnell didn’t include an extension of the EITC in his proposed compromise. In fact, he and the rest of the leadership viewed anything associated with the Obama stimulus bill as “toxic,” according to a senior administration aide working on the issue.

But by accepting EITC extension in the compromise, this anti-poverty program, cheap to administer and highly effective, may end up surviving a Republican Congress. The administration designed the payroll tax reduction to be temporary, but the EITC extension to be permanent. “People will have had it for two years in the Recovery Act and two years in this compromise and Republicans will be on record voting for it,” says the aide. “We view this agreement as a way to get these tax credits more deeply embedded in the tax code.”

Under the Radar

The administration is happy to have the EITC keep its boring name and stay under the radar. During the debate over the stimulus in early 2009, Republicans successfully deleted high- profile programs by yelling on cable TV about colorful things like condom distribution and grass on the National Mall. The EITC, hundreds of times more expensive, received almost no attention at all and survived in the final recovery bill. That’s what Obama wants this time, too.

The bottom line is this: Senator Bernie Sanders, an Independent from Vermont, and Maryland Representative Chris Van Hollen, a Democrat from Maryland, are right on the merits. It’s ridiculous, for instance, to spend $25 billion for estate-tax relief for 6,600 families. But if they and other liberals let their outrage over the rich kill refundables for the working poor, they’ll be hurting the very Americans they say they want to help.

–Bloomberg News–

(Jonathan Alter is a national correspondent for Newsweek and author of “The Promise: President Obama, Year One.” The views expressed are his own.)