What Americans Didn't Get from the Fiscal Cliff Tax Deal

By all accounts, the recently passed tax deal averting the “fiscal cliff” was a big win for the American people.

Among other things, the agreement preserves the full package of Bush-era tax cuts for the middle class and raises rates only on the wealthiest Americans. It also permanently patches the Alternative Minimum Tax so it wouldn’t affect middle-class households.

Moreover, it extends for five more years an expansion of three major tax benefits for lower-income households: the earned income tax credit for low-income wage-earners, the child tax credit and the “American Opportunity Tax Credit,” aimed at helping families defray college costs.  

But Americans may end up losing more than they’ve gained if this agreement is all that passes as “tax reform” this Congress. If so, Americans will have been robbed of an opportunity to rebuild a tax code that’s truly in their favor.

This means a tax code that’s not just less complex but whose benefits, as well as its burdens, are distributed more fairly. In particular, middle-and lower-income Americans deserve far more help than they’re getting to save and invest in their economic security.

According to a 2010 analysis by CFED, the federal government spends more than $400 billion a year—mostly in tax breaks—to help American households accumulate assets and build wealth. In addition to the home mortgage interest deduction, this includes tax incentives for retirement savings, college and entrepreneurship.

The problem is that much of this $400 billion goes to the wealthiest taxpayers. For every $1 in tax benefits that middle-income families receive, according to CFED, millionaires get $188. On average, millionaires receive a tax benefit of $95,820 each year for their savings efforts, while families earning $50,000 receive $509. Families with incomes of $30,000 get just $81. (See a related infographic here.)

But despite its current flaws, the tax code is still a principal engine of social policy, particularly when it comes to savings and retirement security. That’s why true, comprehensive tax reform is essential to building a robust savings system that benefits everyone—particularly with entitlement reform, including Social Security reform, still on the table.

In fact, helping middle-class and lower-income Americans save—and save more—will be of paramount and increasing importance. While there’s little doubt that Social Security for future generations will be less generous than it is today, there’s also little doubt that Americans are woefully ill-prepared to take on more of the burden of their own retirement security.

Just 14 percent of Americans say they’re confident of a comfortable retirement, and in fact, many Americans assume they can’t afford to retire. According to Gallup, the percentage of Americans expecting to work past 65 has more than tripled since 1990 (and most people today expect to stay on the job until they’re a ripe 67).

Enhancing savings incentives in the tax code is a critical piece of Americans’ retirement security. Moreover, there’s no shortage of proposals for improving the current system. Rep. Richard Neal (D-MA), for example, has proposed expanding the current Saver’s Credit, which provides a small “match” to lower-income savers, to benefit more taxpayers. Similarly, the New America Foundation and the Aspen Institute have proposed “matched savings” incentives to benefit and reward lower-income savers through the tax code.

Many policymakers also support the idea of an “auto-IRA,” first proposed by Mark Iwry and David John, to benefit workers in small businesses whose employers don’t currently offer a retirement savings plan.

Unfortunately, proposals such as these might have a tougher time getting their day in the sun. The fiscal cliff tax agreement gave both President Obama and Republicans big enough political “wins” that they may not feel compelled to revisit the tax code in the short term.

For President Obama, who defined “fairness” purely in terms of tax rates paid by the wealthy, the deal achieved his political goal of raising taxes on the “top 2 percent” of Americans. For Republicans, the debate now moves to the debt limit and government spending, which is turf they feel comfortable conquering. Moreover, to the extent that tax issues arise again, the likely context will be that of raising revenue, rather than reforming social policy.

Nevertheless, let’s hope that Congress can see past short-term wins and deadlines to the bigger issues of financial security that Americans are facing in the long-term, and the vital role that a sensible tax code can play in providing Americans with more tools to achieve economic security and success.