Taxes Blog

Finance Blogs » Taxes Blog » The invisible tax cut

The invisible tax cut

By Kay Bell ·
Tuesday, October 19, 2010
Posted: 3 pm ET

Have you been enjoying your tax cut this year?

If you answered, "What tax cut?" you're not alone. Although 2010 began with the Making Work Pay tax credit in place, surveys indicate that most Americans don't realize that their take-home pay is a bit larger.

The New York Times reports that the Obama administration's signature tax cut of the past two years, the Making Work Pay tax credit that decreased federal income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed.

The credit was highly touted when it kicked in back in April 2009. Withholding tables were recalculated so that workers would see around $10 more each paycheck.

But as soon as the early attention faded, folks apparently forgot about the credit. The reason? Apparently, a routine tax reduction doesn't register like one celebrated as a special deal.

The earlier tax rebates, the $300 (or up to $1,200 for some families) ones sent out by the George W. Bush administration, were delivered as separate checks with much fanfare. But analysis of those rebates showed that folks tended to use the windfall to pay bills rather than spend the money on new purchases.

So Obama and his economic advisers decided a regular, though incremental, boost in every worker's paycheck would get the money flowing through the economy more effectively than sending out one lump rebate check.

The jury is still out on whether the Making Work Pay tax credit has been an effective stimulus.

But what is certain, and what the Obama administration didn't take into account, is the psychological effect of an actual check. People remember that chunk of change, whereas they apparently don't notice a few extra dollars in their regular paychecks.

Why is this Making Work Pay tax credit so invisible?

The amount in each paycheck is a bit smaller this year. No, it's still $400 per individual and $800 per married couple. But since the tax credit is being paid out over 52 weeks in 2010 instead of just 39 weeks in 2009 -- remember, it didn't take effect last year until the pay period ending April 3, 2009 -- the per payday credit amount is a bit less.

Plus, in many cases, the nominal federal tax cut was offset by other paycheck pressures.

Companies have cut back, meaning no raises. Then workers who are getting flat wages have seen their take-home income cut thanks to higher premiums for their workplace health insurance.

And, according to the Center on Budget and Policy Priorities, workers in 30 states have seen their state taxes increase this year.

So while the Making Work Pay tax credit has in fact reduced workers' federal taxes, it just doesn't seem like it has.

Has the paycheck tax credit made any difference to your bottom line? Would you have preferred a lump-sum check? What would you have done with a rebate check if you'd received one?

In addition to all the tax information available on Bankrate, get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
October 20, 2010 at 8:28 am

Yeah $10/paycheck does nothing when my healtcare premiums increased by $30/paycheck (that's 12%) and it will be another 12% higher this coming year. healthcare reform? where are the protections that keep premiums from jumping so high (some reports show some insurance companies got approval to raise rates as much as 47%!!!) when our paychecks are rising by 2% or less! YIPEE, Obama...fabulous job!