The White House, per Zachary Goldfarb at the Washington Post, is considering returning to the working family tax cut used in 2009-2010 as part of the Recovery Act, to replace the payroll tax cut, which expires at the end of the year. The refundable tax credit would not deal with the Social Security trust fund in any way and serve to boost take-home pay.
Obama administration officials have concluded that the economy, while improved, is still fragile enough that it may need another bout of stimulus. The tax cut would replace the payroll tax cut championed by President Obama in 2011 and 2012, which was designed as a buffer against economic shocks such as the financial crisis in Europe and high oil prices. It expires at year’s end.
The new tax cut could provide hundreds of dollars or more a year to workers and show up in every paycheck. It may be similar to a tax cut Americans received in 2009 and 2010, which provided up to $400 for individuals and $800 for married couples, sources close to the administration said.
Making Work Pay, the name of the stimulus-era tax cut, was actually a better deal for the working poor. The flat $400 tax credit provided a bigger boost at the low end to anyone making under $20,000 a year than the payroll tax cut, which gave back 2% of income to everyone on the portion of their income affected by the payroll tax, around $110,000. This made it a more stimulative tax cut, since it provided more money to those with a higher marginal propensity to spend. Employers accomplished the tax cut by taking less out of withholding, making it kind of a hidden tax cut that workers didn’t know about. But it did raise their take-home pay.
The Making Work Pay tax cut cost about half as much as the payroll tax cut because it phased out at higher incomes (around $95,000 for individuals, $190,000 for couples). There’s no indication of specific dollar amounts here, but clearly the Administration could just increase Making Work Pay to provide the same level of macroeconomic stimulus as the payroll tax cut.
Leading Democrats like Chris Van Hollen probably helped nudge forward this idea by focusing the conversation on extending the kind of measure that provided the effective wage subsidy that the payroll tax cut did. Recent research shows positive results for tax cuts at the low end of the income scale in a time of economic recovery. Former Clinton chief economist Laura D’Andrea Tyson found that tax cuts for the bottom 95% of the income scale work much better as stimulus than those for the top 5%.
Clearly the payroll tax cut, with its association to the Social Security trust fund, was dead in the water. In reality, every penny cut has been repaid to Social Security from the General Fund, but Democrats were nervous about the association and the potential rhetorical argument that Social Security now impacted the bottom line of the budget. Not only is Making Work Pay an alternative around that conversation, it’s actually better stimulus.
This proposal, which is really just a trial balloon at this point, has a long way to go. It could obviously get folded into the fiscal slope negotiations, in the event of an Obama election victory. But I’m gratified that the Administration is actually seeking the right policy here for the overall economy, rather than a wrongheaded deficit strategy that fails to deal with the immediate jobs crisis.