Why Congress should bring back the Making Work Pay tax credit

The Making Work Pay tax credit was far more effective than the 2011 payroll tax cut which replaced it, and the economy could use the boost a bulked up MWP would provide

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.