The Making Work Pay credit and the payroll tax holiday

[ProSense]

<...>

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes. These changes may result in an increase in take-home pay. The amount of the credit will be computed on the employee's 2009 income tax return filed in 2010 and the employee's 2010 tax return filed in 2011. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 and 2010 tax returns.

more

The significance: With the MWP credit expiring at the end of this year, it will be applied to 2010 returns being filed in 2011.

Extending the MWP credit would have had an impact on 2011 returns being filed in 2012.

On the other hand, the payroll tax holiday will result in an immediate increase in applicable paychecks through 2011.

The total 2011 effect: An MWP credit at tax time and a noticeable increase in pay for millions of Americans.

[Hello_Kitty]

1. Spin baby spin!

Does not change the FACT that the lowest wage workers in the U.S. are the only group who will see an INCREASE in taxes from this year to next.

[ProSense]

2. Doesn't change the fact

that people will see the benefit of the credit at tax time and an immediate increase in pay, something that the MWP would not do, especially if allowed to expire.

[Milo_Bloom]

3. It just won't do anything to stimulate the economy.

http://economistsview.typepad.com/economistsview/2010/09/will-a-payroll-tax-cut-stimulate-the-economy.html?cid=6a00d83451b33869e2013486d36e5c970c

[ProSense]

6. That's

a payroll tax cut on employers, not the same thing.

[Milo_Bloom]

16. You're just dipping it in wrong sauce today, aren't you?

"Also, the policy analyzed in the paper is best interpreted as a payroll tax cut on the worker side. I don't think it matters if the cut is on the employer side, and I hope the administration doesn't pursue this anyway since the employer side tax cut may not pass through to labor fully"

[ProSense]

20. Here is the conclusion from the paper

11 Conclusion
The main problem facing the model economy I have studied in this paper is insufficient demand.
In this light, the emphasis should be on policies that stimulate spending. Payroll tax cuts may not
be the best way to get there. The model shows that they can even be contractionary. What should
be done, according to the model? Traditional change in government spending is one approach.
Another is a commitment to inflate. Ideally, the two should go together. Government spending
has the advantage over inflation policy in that it has no credibility problems associated with it.
Inflation policy, however, has the advantage of not requiring any public spending, which may be
at its "first best level" in the steady state of the model studied here. Any fiddling around with
the tax code should take into account that deflation might be a problem. In that case, shifting
out aggregate supply can make things worse.

It is worth stressing that the way taxes are modeled here, although standard, is special in a
number of respects. In particular, tax cuts do not have any "direct" effect on spending. The labor
tax cut, for example, has an effect only through the incentive it creates for employment and thus
"shifts aggregate supply," lowering real wages and stimulating firms to hire more workers. One
can envision various environments in which tax cuts stimulate spending, such as old-fashioned
Keynesian models or models where people have limited access to financial markets. In those
models, there will be a positive spending effect of tax cuts, even payroll tax cuts like the ones in
the standard New Keynesian model.

It is also worth raising another channel through which tax cuts can stimulate the economy.
Tax cuts would tend to increase budget deficits and thus increase government debt. That gives the
government a higher incentive to inflate the economy. As we have just seen in Section 9, higher
inflation expectations have a strong positive impact on demand at zero interest rates. Eggertsson
(2006) models this channel explicitly. In his model, taxes have no effect on labor supply, but
instead generate tax collection costs. In that environment, tax cuts are expansionary because
they increase debt and, through that, inflation expectations.

What should we take out of all this? There are two general lessons to be drawn from this paper.
The first is that insufficient demand is the main problem once the zero bound is binding, and policy
should first and foremost focus on ways in which the government can increase spending. Policies
that expand supply, such as some (but not all) tax cuts and also a variety of other policies, can
have subtle counterproductive effects at zero interest rates by increasing deflationary pressures.
This should — and can — be avoided by suitably designed policy.

The second lesson is that policy makers today should view with some skepticism empirical
evidence on the effect of tax cuts or government spending based on post-WWII U.S. data. The
number of these studies is high, and they are frequently cited in the current debate. The model
presented here, which has by now become a workhorse model in macroeconomics, predicts that
the effect of tax cuts and government spending is fundamentally different at zero nominal interest
rates than under normal circumstances.

Not only is it not conclusive, it cites situations in which tax cuts can be expansionary.

[Milo_Bloom]

25. I love watching you back it up.

First you try to claim it doesn't apply.

After that is proven unture.

Then you say... Well.. it's not CONCLUSIVE!

Nothing is EVER conclusive.

Water too heavy?

[GinaMaria]

27. You've got that right! This is a lame way to stimulate the economy

If we are truly focused on stimulating the economy, we need to look at spending (specifically 4 types/areas)

http://www.economy.com/mark-zandi/documents/assissing-t ...

Check Table 1 on page 4

Fiscal Economic Bang for the Buck
One year $ change in real GDP for a given $ reduction in federal tax revenue or increase
in spending

Tax Cuts
Non-refundable lump-sum tax rebate 1.02
Refundable lump-sum tax rebate 1.26

Temporary tax cuts
payroll tax holiday 1.29
Across the board tax cut 1.03
Accelerated depreciation 0.27

Permanent tax cuts
Extend alternative minimum tax patch 0.48
Make Bush income tax cuts permanent 0.29
Make dividend and capital gains tax cuts permanent 0.37
Cut in corporate tax rate 0.30

Spending Increases
Extending UI benefits 1.64
Temporary increase in food stamps 1.73
General aid to state governments 1.36
Increased infrastructure spending 1.59

The biggest bang for our buck is in Spending increases. UI benefits return 1.64 dollars for every dollar spent. Food stamps 1.73

Permanent tax cuts? yeild less than gets paid out. That's the losing strategy.

[Hello_Kitty]

4. What are you talking about? MWP was done by withholding too.

You got any remaining credit refunded to you at the end of the year if there was any left. Unless your income was from self employment like mine.

[ProSense]

11. "You got any remaining credit refunded to you at the end of the year if there was any left. "

The withholding decreases were negligible compared to a payroll tax holiday.

The payroll tax holiday will be more noticeable, and again, the applicable MWP credit will still be realized at tax time.

[Hello_Kitty]

14. And it's only happening to poor stiffs, so who cares?

:grr:

[ProSense]

17. You're angry at your own words?

Fine. Killing the deal screws all low-income, unemployed and all middle-class Americans.

[Name removed]

19. Deleted message

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[ProSense]

21. Oh please

You put words into someone's mouth and want to call bullshit?

Who the hell said you have power to kill the deal?

[Name removed]

23. Deleted message

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[ProSense]

24. You have no idea what I give a shit about.

I don't give a shit about your opinion.

[DJ13]

5. You remember how many people

didnt know (still dont) that they have lower payroll taxes since Obama was elected?

Why do you think that is the case?

Because a few dollars here or there spread out over 52 weeks isnt a large enough sum to be noticeable.

The proposed tax witholding cut will be the same.

The MWP however was big enough to be noticed.

And it will be missed by many low income people.

[Hello_Kitty]

7. It truly is revolting how people are defending this

If anyone but poor people were being treated unfairly by this plan no one would be this dismissive.

Imagine if there were some glitch in the compromise that messed with the Child Tax credits of middle class yuppies. Heaven forfend! THAT would be taken seriously.

[apocalypsehow]

8. Yes, and it will help tens of millions of struggling families in this country. These are folks who

don't have time to sit around screaming "corporate sell-out" on discussion boards, but are struggling to pay the electric bill and put food in their kid's stomachs. These are the folks one paycheck away from a financial disaster - they don't have the luxury of waiting for a "perfect" bill.

Kick, Rec. :thumbsup:

[avaistheone1]

10. NAFTA was supposed to help struggling families not only here

but in Mexico too. That certainly never happened.


This is another scam, but this time to weaken Social Security. :thumbsdown: :thumbsdown: :thumbsdown:

[Hello_Kitty]

15. Those are the very workers getting the tax increase next year.

But hey, I bet you're making out good.

[Milo_Bloom]

18. It won't help them at all.

[FBaggins]

9. I think you misread that.

Most people received the MWP credit over the course of the year, not at filing time.

[ProSense]

12. It was both.

The payroll tax holiday is by paycheck.

[FBaggins]

13. Most of the people who had to wait for filing time... Got the short end of this stick.

In order to get the credit at filing time, you had to be someone with essentially
no federal liability (and thus no withholding). A high percentage of same are the people who would get more from MWP than from the 2% cut.

The real stimulative impact of the change is that the cut is larger for
most people.

[Hello_Kitty]

28. If you make $100K you gain $2K from this deal. Make $10K and you lose $200.

Totally unfair.

[Name removed]

22. Deleted message

Message removed by moderator. Click here to review the message board rules.

[hay rick]

26. Try reading it again.

The part where it says: "...the credit will typically be handled by their employers through automated withholding changes." Most people who are eligible for the credit have already received it in the form of reduced withholding throughout the year(increased take-home pay).

The discontinuation of MWP would offset approximately half of the "stimulus effect" of the proposed payroll tax holiday.

[ProudDad]

29. Willaim Greider: President Obama Threatens Social Security

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=439x1357

[niceypoo]

30. Democrats are starting to sound like Republicans

Tax cuts! Tax cuts! Tax cuts! Tax cuts! Tax cuts! Tax cuts!