A Worthy Alternative to the Payroll Tax Cut

December 14, 2012 at 3:50 pm

We’ve explained that if policymakers don’t extend the temporary cut in the Social Security payroll tax, every paycheck in America will shrink starting next month, slowing next year’s economic growth rate by 0.6 percent, according to Goldman Sachs.  The President proposes extending this tax cut for one year or replacing it with something comparable.

An alternative that the Urban-Brookings Tax Policy Center’s Roberton Williams advanced last year deserves a fresh look:  bring back the “Making Work Pay” tax credit for one year and double it, for about the same total cost as simply extending the payroll tax cut for one year.

Enacted in the 2009 Recovery Act, Making Work Pay gave workers a credit worth 6.2 percent of their earnings up to $400 for singles and $800 for couples.  It phased out between $75,000 and $95,000 (twice that for couples).  The credit expired after 2010 and the payroll tax cut essentially replaced it.

A new Making Work Pay credit worth up to $800 for singles ($1,600 for couples) would cost roughly the same as extending the payroll tax cut.  But it would have greater bang-for-the-buck because it would flow more to moderate-income people (see chart), who are more likely to spend rather than save any extra income they receive.

And, because Making Work Pay operates through the income tax, it would put to rest concerns that continuing the cut in payroll taxes — which help fund Social Security — would undermine that program.  (As we’ve noted, offsetting contributions to the Social Security trust funds from general revenues have held the trust funds harmless from the reduction in payroll taxes, and this arrangement doesn’t pose a danger as long as it remains strictly temporary.)

If policymakers can’t agree on an expanded Making Work Pay or another equivalent alternative, they should extend the payroll tax cut.  The economic risks of letting it expire are just too high.

Print Friendly

More About Chuck Marr

Chuck Marr

Chuck Marr is the Director of Federal Tax Policy at the Center on Budget and Policy Priorities.

Full bio | Blog Archive | Research archive at CBPP.org

2 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    Thanks are sharing valuable information on Payroll Tax Cut.Please update more often.

  2. Cynthia Bage #

    I’m concerned about how this will affect the Social Security Trust Fund. Is there any chance that such realignments will not be detrimental to it’s continual survival?

Your Comment

Comment Policy:

Thank you for joining the conversation about important policy issues. Comments are limited to 1,500 characters and are subject to approval and moderation. We reserve the right to remove comments that:

  • are injurious, defamatory, profane, off-topic or inappropriate;
  • contain personal attacks or racist, sexist, homophobic, or other slurs;
  • solicit and/or advertise for personal blogs and websites or to sell products or services;
  • may infringe the copyright or intellectual property rights of others or other applicable laws or regulations; or
  • are otherwise inconsistent with the goals of this blog.

Posted comments do not necessarily represent the views of the CBPP and do not constitute official endorsement by CBPP. Please note that comments will be approved during the Center's business hours. If you have questions, please contact communications@cbpp.org.

× 5 = thirty five

 characters available