Tax Overhaul Plan Will Help ‘Middle Earners,’ GOP Says

Republicans say their planned tax overhaul is aimed at providing a tax cut to "middle-income" Americans, but they have yet to say exactly where they draw the line and who qualifies as middle-class people worthy of protections.

A decision will have to come next week, when GOP leaders plan to roll out their bill, and will have to draw those lines as they reduce the existing seven personal income tax brackets to just three or four rates.

The cutoff point will matter not just for rates but also for how lawmakers draw special tax breaks.

A group of Republicans is pushing to double the child tax credit, but they're still trying to figure out exactly where to place the "phase-out" level.

"We're going to have to take a look at that number and see how far up the income ladder we can climb," said Sen. Tim Scott, South Carolina Republican. "The numbers matter trying to figure out how much good we can do for the meat of the middle class is important."

Practically speaking, exactly where lawmakers land on their definition of "middle class" could translate into a difference of thousands of dollars a year for average U.S. households as Republicans press forward with their tax overhaul.

For example, the current child tax credit is worth up to $1,000, but it begins to decline in value once a couple's income tops $110,000 a year, and it phases out entirely at $175,000.

Mr. Scott, a member of the tax-writing Senate Finance Committee, said that, for him, the top end of "middle-income" earners would fall somewhere in the neighborhood of $200,000 to $250,000, basing the range on household data from two dozen or so key areas around the country.

"Democrats [say] that millionaires and billionaires start at $250,000, so I'm not going to put a whole lot of weight on what they think unless they're willing to come to the table and actually negotiate," Mr. Scott told The Washington Times.

Rep. Kevin Brady, who, as chairman of the Ways and Means Committee, is Congress' top tax-law writer, said the definition could even vary depending on where someone lives — and he'd like to find a way to reflect that in the tax code.

"If you live in states where state and local governments just hammer people with high taxes and drive up the cost of housing and food and other elements, [the] middle class is much different there for the standard of living than it is perhaps in my part of Texas," Mr. Brady said at a Christian Science Monitor breakfast.

President Barack Obama faced his own questions about where to draw the middle-class line during the Obamacare and tax-hike fights of 2010 and 2012. Mr. Obama said individuals making $200,000 and couples making $250,000 were "rich" and should face increases.

In the end, when Congress struck the "fiscal cliff" deal at the end of 2012, lawmakers settled on individuals making more than $400,000 per year and couples making more than $450,000 as the level for tax-rate increases.

Rep. Chris Collins, New York Republican, said that in the current debate, lawmakers are eyeing a middle-income range of $200,000 to $400,000, though he said that for his Buffalo-area district, it would be more like $60,000 to $100,000.

"We have to look at the two schoolteachers who are married living in Long Island. They're making $300,000 — 150 [thousand] apiece," he said. "We have to take care of everyone as best we can."

Politicians generally put the "middle-class" definition in the context of a range that's going to encompass most of their constituents, said Brian Riedl, a senior fellow at the Manhattan Institute.

"The challenge they face is that in terms of income taxes, the middle class doesn't pay much of anything right now," he said. "So it's really hard to give the bulk of tax relief to those outside the top 20 percent when the top 20 percent is already paying 88 percent of the income tax."

The ongoing attempt to pin things down by income level can also be somewhat of a lose-lose situation, said Scott Greenberg with the Tax Foundation.

"Any definition of middle class will either be so expansive as to be useless or narrowed as to some people feel like they're excluded," he said. "That's part of the reason why this is difficult."

Senate Minority Leader Charles E. Schumer said Wednesday that the middle class should be wary of the GOP's plans.

"I'd say to the average American, is your No. 1 goal reducing taxes on corporations and the richest people in America? Well, that's the Republican Party's No. 1 goal," said Mr. Schumer, New York Democrat.