Planning the Anti-Recession Stimulus: The Make Work Pay Tax Credit

March 09, 2020

As the Trump administration’s ineptitude is rapidly increasing the likelihood of a recession, we have to plan for a stimulus to counteract the worse effects. Many people (including me) have mentioned the possibility of a cut in the Social Security payroll tax as being a major component of a stimulus package. The idea is that the cut would be simple, progressive, and could get into people’s pockets quickly. We have a model for this, the Obama administration put in place a 2.0 percentage point reduction in the Social Security payroll tax in 2011 in order to provide a boost to the recovery.  

When Obama put this cut into place, the Social Security trust fund was reimbursed for the lost revenue, and the payroll tax returned to its prior level in 2013. While that worked out fine, there is a potential problem in going this route.

The payroll tax has been the main designated funding source for Social Security since its creation in 1937. Under the law, it is operated as a separate program and it can only pay benefits if it has money available from its designated revenue sources.

It is no secret that the Republican party is extremely hostile to Social Security. Prominent Republicans have often proposed cuts to the program and President George W. Bush wanted to privatize it.

A temporary cut to the Social Security tax raises the possibility of Republican game-playing, which could worsen the program’s finances and create a situation that eventually forces cuts. While last time the Republicans in Congress did not interfere with the tax returning its prior level and left the trust fund unharmed, we certainly should not assume that the current crew of Republicans would act in good faith. 

For this reason, it would be best to have a tax cut that was not directly tied to the Social Security payroll tax. The Make Work Pay tax credit that was part of President Obama’s initial stimulus is a great model. This tax cut effectively refunded 6.2 percent of workers’ pay, up to $400. This meant that anyone earning over $6,500 a year got the full amount of the tax credit. It phased out for incomes over $100,000. That made the tax cut considerably more progressive than a payroll tax cut and it was not tied to Social Security in any way whatsoever.

This sort of tax cut would be a great model for a tax cut to offset some of the economic impacts of the coronavirus. Of course, we would want to do much more.

We recognize that close to a quarter of the workforce does not have paid sick leave. We don’t want people to go to work when they are sick. We should have a generous tax credit to employers (e.g. $800) to extend at least seven paid sick days a year to workers who do not already have it. We also need to pay for testing and treatment of coronavirus to ensure that people who are uninsured or who have bad insurance will come in for testing.

We also have to remember that when schools are closed, many lower-income children are missing out on lunches and breakfasts. We need more money for food stamps and other forms of assistance for low-income families.

And, we need to put more public money into developing a vaccine. Also, we have to move into the 21st century in our thinking about this research. It should be fully open. We want our researchers not only sharing their findings with each other so that all can benefit from new results, but also with researchers in Europe, China, and elsewhere. Science advances most quickly when it is open.

And, when we do get a vaccine, it should be in the public domain so that it can be sold as a cheap generic from Day One. We shouldn’t have to worry about whether a vaccine will be affordable, it will be cheap if the government doesn’t grant a patent monopoly. The problem with high drug prices is not that we need the government to make drugs affordable, we need to stop the government from granting patent monopolies that make drugs expensive.

Anyhow, the full story of an effective stimulus would be longer, but this is a good start.


Support Cepr


If you value CEPR's work, support us by making a financial contribution.

Si valora el trabajo de CEPR, apóyenos haciendo una contribución financiera.

Donate Apóyanos

Keep up with our latest news