Making Work Pay for Couples
co-authored with Mark Greenberg, Georgetown Center on Poverty, Inequality, and Public Policy
During the Presidential campaign, Barack Obama talked about the Making Work Pay tax credit as being an offset to the payroll tax on the first $8,100 of earnings for each worker (6.2% * $8,100 = about $500). During the campaign, Tax Policy Center analyzed the credit in the context of individual earnings – even in the case of married couples. If only one partner worked, we assumed the maximum credit for the couple was $500 and if two partners worked, TPC assumed the maximum credit increased to $1,000.
Not so, as it turns out.
Two significant changes happened during the legislative process. First, the credit for a single worker was reduced to a maximum of $400, and to $800 for a couple, to bring down the overall cost of the provision.
Second, in the case of a couple, the credit applies to joint – not individual earnings. This means that even if only one partner in the couple works, the maximum credit for a married couple is $800 – not $400. This, reportedly, is what Congress intended.
Basing Making Work Pay on joint earnings is consistent with how credits are typically structured, but it means that the credit is less of an individual worker’s credit than initially envisioned. As originally proposed, the Making Work Pay credit provided a precedent for determining credits based on individual wages. Moving in this direction could ultimately have the effect of reducing or even eliminating marriage penalties for low-income families. Certainly there would have been fewer marriage penalties associated with the Making Work Pay credit
The calculation of the credit based on joint earnings also raises a new challenge for administering the credit. Reportedly, the Administration plans to implement the credit through adjustments to wage withholding. Now, of course, the idea of giving this credit right away through a change in the tax withholding tables is more complicated than it would have been if the credit were based on individual earnings.
In response to this change in our understanding, the Tax Policy Center has updated the description of the Making Work Pay credit in the Conference Report Card.