Obama Had It Right the First Time: Bring Back the Making Work Pay Tax Credit

By :: December 5th, 2011

Last December, Congress replaced the two-year-old Making Work Pay tax credit (MWP) with this year’s payroll tax cut. That change cut taxes for higher-income workers, raised taxes for some low-wage workers, and nearly doubled the amount of lost tax revenue. And it most likely provided less bang-for-the-buck economic stimulus than the credit it replaced.

Since our anemic economy still needs a boost, why not reverse course and bring back the MWP in a bulked-up form? That step would provide more powerful macro medicine for 2012.

A quick review: MWP provided a credit in 2009 and 2010 of 6.2 percent of earnings up to $400 for singles and twice that for couples. It phased out between $75,000 and $95,000 of income (twice that range for couples). That meant that most of the tax savings went to low- and middle-income workers, the group most likely to spend rather than save the extra cash.

In contrast, the 2011 payroll tax cut equals 2 percent of earnings up to a maximum of $2,136 per worker with no income limit. Tax savings for high-income recipients probably went largely into savings accounts and delivered little economic kick. On balance, the payroll tax cut almost certainly had less bang-for-the-buck than MWP but its doubled cost probably resulted in a greater overall boost to the economy.

A Tax Policy Center analysis showed that replacing MWP with this year’s payroll tax cut raised taxes for about one-third of households (60 percent with income under $20,000) and lowered taxes for about half of households (nearly a third with income over $75,000). Shifting tax savings from low- to high-income households certainly diluted the stimulus.

Congress could revert to the original MWP or go with a beefed up MWP with double the maximum benefits--$800 for singles and $1,600 for couples. TPC analysis shows that the latter would cost roughly the same as extending the payroll tax cut but would focus tax savings on low- and middle-income families, those most likely spend the extra money—half would go to households with income under $50,000 and 80 percent to those with income under $100,000. In contrast, 60 percent of an extended payroll tax cut would go to households making more than $100,000. Applying MWP’s greater bang-for-the-buck to the larger aggregate revenue loss would give the economy a bigger kick than continuing this year’s policy.

My own tax cut this year—more than $2,000—went straight into savings and I’m not likely to spend it until sometime in the late 2020s when my grandsons head off to college. That certainly did nothing to help the economy now. And I’m sure I wasn’t alone.

So, Congress, raise my taxes in 2012—along with the taxes of people like me—and give the money to lower-income workers who need cash today to make ends meet. They’ll spend every last cent, I’ll hardly notice the change, the economy will grow a little faster, the country will be better off, and we can all celebrate a more promising new year.

10Comments

  1. Michael Bindner  ::  5:50 pm on December 5th, 2011:

    This would be a move in the right direction, but I would rather give the subsidy to families by increasing the Child Tax Credit by a good bit more and then raising the minimum wage. The additional spending would more than prevent any job loss, especially as minimum and low wage workers tend to work in monopsonistic environments where the employer gets economic rent from their productivity. Granted, some businesses will either have to fire some staff or even close – but since when is it the government’s responsibility to subsidize employers who pay low wages or who cannot earn enough revenue to meet their costs and the costs of their workers? We should not be subsidizing exploitation.

  2. Cutting Contributions to Social Security Isn’t the ONLY Way to Stimulate the Economy | Entitled to Know  ::  1:35 pm on December 6th, 2011:

    […] Tax Policy Center’s TaxVox blog provides this great overview of why the payroll tax cut extension is not the best way to provide […]

  3. Kevin  ::  4:41 pm on December 7th, 2011:

    How big could MWP credit be if it was revenue neutral with the Democrats proposed 3% payroll tax cut, instead of the current 2% cut you used in your analysis?

  4. Weekly News Round-Up: December 9, 2011 | Tax Credit for Working Families  ::  8:29 pm on December 9th, 2011:

    […] Last December, Congress replaced the two-year-old Making Work Pay tax credit with this year’s payroll tax cut. That change, according to Tax Policy Center Senior Fellow Roberton Williams, cut taxes for higher-income workers, raised taxes for some low-wage workers, and nearly doubled the amount of lost tax revenue. And it most likely provided less bang-for-the-buck economic stimulus than the credit it replaced. Williams argues that instead of extending the payroll tax cut, Congress should revert to the original Making Work Pay credit, giving a break to low- and middle-income families who are more likely to spend the extra money. (TaxVox) […]

  5. Jon Barber  ::  8:52 pm on December 9th, 2011:

    One negative thing about the current “tax cut” is that there was no provision for self-employed people. Both my wife and I are self-employed but don’t make any more than our employees who get a tax break but we don’t.

  6. Payroll tax cut: Not just for middle class | We Should Have Listened To The Prophets  ::  10:38 pm on December 9th, 2011:

    […] in a blog post, Williams makes a strong case that, instead of extending the payroll tax cut, Congress ought to […]

  7. Economix Blog: Bruce Bartlett:How Politics Came to Dominate Payroll Tax Debate | G7Finance.com – Finance News & Personal Finance Resources  ::  6:34 am on December 27th, 2011:

    […] Budget Office rated it as among the least stimulative fiscal policies. Some economists have argued that the Making Work Pay credit provided more bang for the […]

  8. How Politics Came to Dominate Payroll Tax Debate | Forex Market Today  ::  12:09 pm on December 27th, 2011:

    […] Budget Office rated it as among the least stimulative fiscal policies. Some economists have argued that the Making Work Pay credit provided more bang for the […]

  9. How the Republicans Tried to Kill the Payroll Tax Cut…and Why – Trading 8s  ::  9:59 am on December 30th, 2011:

    […] part of the Democrats’ stimulus bill in 2009, the Making Work Pay credit reduced taxes by 6.2 percent, up to $400, on earnings, phased out between $75,000 and $95,000. (The […]

  10. Making Work Pay vs. the payroll tax cut, in two charts  ::  12:58 pm on October 29th, 2012:

    […] The two policies are basically equivalent in budgetary and stimulative impact. CBO estimates the bang-for-the-buck of the MWP credit (that is, how much the economy grows for every dollar spent on the credit) at 0.3 to 1.5, while Mark Zandi at Moody’s puts it at 1.19. Zandi puts the benefit of the payroll tax holiday at 1.27, slightly higher. Some analysts, like the Tax Policy Center’s Roberton Williams, argue the payroll credit is less stimulative, contrary to Zandi’s estimates. […]