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Thursday, September 23, 2010

Making Work Pay Credit & Economic Stimulus - Need for Better Discussion

The Wall Street Journal reported yesterday (9/22/10) - "Obama Tax Credit Looks Endangered" by McKinnon. The article refers to the Making Work Pay Credit (MWPC) that was added for 2009 and 2010 by the American Recovery and Reinvestment Act. President Obama would like to extend it through 2011. The estimated cost would be about $60 billion for 2011.

Is this good tax policy? I have a few questions and observations I'd like to see be part of the debate on whether the temporary MWPC and Economic Recovery Payment should be extended.

1 - Effective stimulus? The MWPC was originally enacted for economic stimulus purposes. If we still need economic stimulus perhaps we don't need the MWPC (if it really helped the economy before, why do we still need economic stimulus?) I'm aware that unemployment rates are still high and the economy is weak, I just think the question needs to be answered - was the MWPC the best type of stimulus?

One issue raised about MWPC in its original form was that the credit was doled out via paychecks. A single person eligible for the full $400 credit saw and extra $7.70 in her weekly paycheck. This distribution method was intended to better ensure that those receiving the credit spent it rather than saved it. Let's see Congress and the Administration engage in the discussion - is the MWPC the best type of economic stimulus?

Obama also proposes to extend the Economic Recovery Payment of $250 for those on Social Security for one year. This was a companion to the MWPC and a person could not receive both. Again, there should be a discussion of whether this is the best economic stimulus. If not, something else should be done with the approximately $74 billion the 1-year extension of these provisions would cost. [Joint Committee on Taxation, JCX-7-10R]

2 - How do we pay for one more year of the MPWC and the ERP? What spending will be cut or taxes raised to cover the $74 billion cost of a 1-year extension and how will that change affect the economy?

3 - Are these provisions too generous? The MWPC results in $400 for single taxpayers and $800 for married taxpayers. There is an AGI phase-out, but it is fairly high - $75K for single and $150 for married. I say fairly high because, as reported by the US Census Bureau recently (9/16/10), the "real median household income in the United States in 2009 was $49,777" (9/16/10 press release).

The cost of extension can be reduced by lowering the AGI phase-out levels. But again, see my question 1 above.

4 - What does temporary mean? It is not unusual for Congress and the President (and taxpayers) to really view a "temporary" measure as meaning only that Congress has to revisit regularly to extend. That is not really temporary. It also hurts the budget, creates compliance difficulties and becomes a pointless exercise because there is little discussion or data collection to inform the almost non-existent debate on why temporary measures should be extended.

5 - Are there reasons other than economic stimulus for the MWPC? The Administration's reasons for a 1-year extension of the MWPC are (Greenbook FY2011, page 1):

The MWP credit partially offsets the regressivity of the Social Security payroll tax. It effectively raises the after-tax income of workers eligible for the credit, which makes work more remunerative and so encourages individuals to enter the labor force. Furthermore, the ability of many taxpayers to receive the credit through reduced withholding, rather than after the end of the tax year, increases the incentive effects of the credit. Extending the credit would allow the positive benefits of the credit to continue during the period in which the economy is still recovering from the recession."

If there is truly concern about the need to reduce regressivity of the Social Security tax, the proposal should be for a permanent MWPC. However, I think that reason is a bit misleading in that there is already an Earned Income Tax Credit that provides significant relief from regressivity of the Social Security tax for low-income wage earners.

Hopefully there can be a well-informed discussion in Congress on whether extension of the MWPC and Economic Recovery Payment is the best type of stimulus and considering the points above.

What do you think? What would be the best use of $74 billion to help the economy?

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