Senate Passes Tax Cut Package 81-19

The senate overwhelmingly, if grudgingly, approved the controversial tax cut package this afternoon. The bill now goes to the House for amendment or approval. Several House Democrats and Republicans have publicly announced that they will not support the bill as it stands.

The tax cut bill extends the George W. Bush-crafted tax reductions for taxpayers at all income levels, including the rich, a point of contention for Democrats who believe that portion should expire. It also includes an approximate one-third reduction in payroll taxes for one year which will replace the Making Work Pay credit available in 2009 and 2010.

The main sticking point with House members is the estate tax. The proposed changes would see the tax rate drop from 55 percent to 35 percent and be applied to estates over $5 million rather than the scheduled $1 million. The reduction is meant to allow the transfer of small business assets or shares to heirs without losing the business to pay the estate tax.

Why the Tax Cuts For the Rich are Controversial

Besides the general working philosophy of the Democrats that the rich should pay proportionally more than the poor under a progressive tax scheme, the proposed tax cuts for those in the highest tax brackets may not have the same stimulative effect on the economy. Economists state that those in lower tax brackets spend a larger proportion of their after-tax income on goods and services: food, medical care, repairs and maintenance, and gas, for example. Those with higher after-tax incomes slow their spending down when income rises. There is only so much food one can eat, for example. More of that income is invested and saved, which does not kick-start the economy and get businesses working again. The purpose of the tax cuts is to put more money in people's pockets so they can spend it. This occurs mostly in the middle class tax brackets.

How the Payroll Tax Holiday Will Affect Your Paycheck

The proposed payroll tax holiday will see employees paying 4.2 percent in payroll taxes rather than 6.2 percent for 2011. The savings will be about $800 for those making $40,000 and will top out at $2,124 at the maximum social security limit of $106,200. This payroll tax savings will replace the old Making Work Pay credit which almost all employees received but topped out at $400 for individuals.

The U.S. approach to recovering from the recession is substantially different from that in the United Kingdom, where the government is choosing austerity measures and spending cutbacks over economic stimulus.