Does the Middle Class Need Tax Cuts?

NEW YORK (MainStreet) — After months of heated debate in Washington, President Obama announced Monday that his administration has reached a tentative deal with the Republican leadership to extend Bush-era tax cuts for all Americans for two more years.

As part of the compromise, the administration agreed to propose extending tax cuts for households earning $250,000 or more a year while Republicans agreed to extend unemployment benefits for an additional 13 months. The plan would also reduce the Social Security tax for nearly all employees to 4.2% from the current 6.2% and lower the estate tax to 35% on properties worth more than $5 million.

Both parties agreed that tax cuts should be extended for middle-class households, but Republicans refused to approve a tax cut extension that did not also apply to the wealthiest households. Ultimately, it proved too politically unpalatable to let taxes go up on middle-class Americans when unemployment is still near 10%, which led the administration to this compromise.

"I'm not willing to let working families across this country become collateral damage for political warfare here in Washington," Obama said, according to the Associated Press.

Republicans have long argued that raising taxes on households earning $250,000 or more would hurt small businesses and potentially undermine economic recovery. Most Democrats, on the other hand, argue that extending tax cuts for this income group would help only a small percentage of businesses, while adding billions to the deficit. Moreover, Democrats noted that these households are also less likely than middle-class households to spend the money they save from the tax cuts, which would further weaken the economy.

With the compromise proposal set to go before Congress before the end of the year, MainStreet decided to take a look at the numbers. Would it really be the end of the world if tax cuts expired for middle-class Americans? Sure, all things being equal people would probably rather pay fewer taxes and have a little extra money to play with after each paycheck, but how much would the tax cuts really help average Americans compared to what they would cost our economy in the long run?

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