The tax hike nobody's talking about

By Blake Ellis, staff reporter


NEW YORK (CNNMoney.com) -- Get ready for a smaller paycheck.

At least that's what could happen if Congress doesn't approve President Obama's proposal to extend the Making Work Pay tax credit soon.

The credit, introduced last year as part of the government's stimulus package, boosts paychecks by up to $400 for single filers and up to $800 for joint filers, by reducing the amount of tax withheld from each paycheck.

And that extra $15 bump you're used to getting each bi-weekly pay period is slated to expire at the end of the year unless Congress votes to extend the credit, much like the Bush tax cuts.

But unlike those cuts, which were largely viewed as a benefit for wealthier Americans, the Making Work Pay credit is designed exclusively as a middle-class benefit, and will affect a wider base of taxpayers.

"You hear a lot about the Bush tax cuts, but surprisingly, the [Making Work Pay credit] isn't getting as much attention as you would think," said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities.

Under the Making Work Pay credit, taxpayers who make $75,000 or less are eligible to receive the full credit, while higher earners can receive partial credit.

Last year, since the tax break didn't go into effect until April, the $400 credit was distributed over the remaining months of the year, so most filers who received the full credit got an extra $15 a week -- as opposed to every two weeks in 2010.

Because the Making Work Pay credit helps out more than 75% of American households, taking this tax break away will save the government much-needed money, but it is likely to cost a lot politically.

"So many people get this credit, it's not going to be easy to take it away," said Elaine Maag, a research associate at the Urban-Brookings Tax Policy Center. "If it isn't [extended], people are definitely going to notice and be upset."

In his $3.8 trillion budget for 2011, Obama proposed a year-long extension to the Making Work Pay credit and pushed to make the tax cuts passed during the Bush administration permanent, except those aiding households that earn more than $250,000 a year.

If the extension isn't passed, the 110 million families that received higher paychecks in 2009 and 2010 will be back to where they started and will owe more taxes than they did during those two years.

And because of the steep cost of keeping the Making Work Pay tax break around -- about $60 billion to extend it one year -- Marr said he wouldn't be surprised if Congress doesn't end up passing the extension.

"The argument to extend the credit is that the economy is weak and the people who get this credit are the people who tend to spend a large share of their income, so if you [don't extend] this, you will decrease their spending, which is a drag on the near-term economy," said Marr. "But on the flip side, it's expensive." To top of page

 
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