Save the Making Work Pay Tax Credit but Narrow It
While Washington seems obsessed with the fate of the Bush tax cuts, it has paid little attention to a soon-to-expire Obama tax cut: the Making Work Pay credit (MWP). Like the 2001 and 2003 tax cuts, this credit, which was enacted as part of the 2009 stimulus, is also scheduled to expire at the end of this year. President Obama has proposed extending it through 2011. But Congress has been largely silent about what it plans to do, in part because extending the credit for another year would reduce federal revenues by more than $60 billion
The fully-refundable MWP provides workers with a credit of 6.2 percent of earnings, up to $400 ($800 for married couples). The credit phases out at a rate of 2 percent of income over $75,000 ($150,000 if married). The credit was originally proposed as a worker subsidy based on individual earnings. As enacted, MWP follows the lead of almost every other provision in the tax code and is based on joint earnings in the case of couples. This year, the credit will deliver almost $60 billion.
When Congress was debating the stimulus bill, MWP scored TPC's top grade. That wasn’t because everyone here at TPC was excited to see Obama make good on his promise to cut taxes for 95 percent of Americans. The credit scored high because it did two things that TPC analysts felt were essential to economic stimulus: it raised take-home pay quickly via a change in the withholding tables (subject to some controversy) and it did so for people who would spend it. Of course, our enthusiasm for the policy was dampened by the fact that the credit went to many higher income families who would save much or all of it, rather than spend it and boost our then struggling economy.
Congress will soon have to get serious about dealing with the expiring tax provisions, and MWP demands a close look. Although I’ve previously advocated for an individual worker credit, MWP doesn’t fit the bill. It does, however, provide the only substantial work incentive for families without children that covers a reasonable range of earnings. (Childless families can also qualify for an EITC worth up to $457, but that credit applies to only a very narrow income range.) In the spirit of supporting work incentives while also recognizing our current fiscal situation, perhaps Congress should consider extending MWP only for low-income families. This might be just what the doctor ordered.