A few weeks ago, while AllBusiness was doing special coverage of some of the things Barack Obama has been doing in office, I mentioned that the Making Work Pay tax credit has gone largely unnoticed by the American people, and may not be all that effective. I have a reader who rebuts the idea that the tax credit is ineffective (although he quite agrees that few people are truly aware of their tax cut). Here are some of the points he made in an email to me, regarding the economy following the institution of the tax credit, to be parceled out in paychecks, from the spring of 2009 through the end of 2010:
- Since April of 2009, tens of billions of dollars have been pumped back
into the economy through this bottom-up tax cut.
- After at least a 3 year decline, Consumer Spending began to rise in
April of 2009.
- After a 2 year decline, the Leading Economic Index began to rise in
April of 2009,
and is currently higher than at any time in many years.
- After a 5 year decline, GDP began to rise in April of 2009.
- After a dramatic 1 year increase, Job losses began shrinking in April of
2009. This has been the most rapid turn from net jobs losses to net
jobs gains of any business cycle in the last century.
- From its low on March 9th, 2009, the current S&P recovery began to
rise in April of 2009 and has outperformed the 1974 and the 2002
rebounds over the equivalent period.
- Ronald Reagan had 10 months of unemployment above 10% (and 19 months
above 9%). So far, Obama has had only 3 months of unemployment above
While I don’t know if all of this can be directly attributed to the Making Work Pay tax credit, it is worth considering that this large de facto tax cut aimed at the working middle class has probably contributed, in some way, to the economic recovery we are seeing now. My reader ends with a quote from the Tax Policy Center, regarding the idea of extending Making Work Pay through 2011:
The credit offsets the regressivity of payroll taxes and encourages
low-income people to work. MWP would reduce income taxes for
three-fourths of all tax units in 2011 by an average of $385, raising
average after-tax income by 0.7 percent. The credit is highly
progressive: after-tax income would rise by 2.6 percent for the poorest
20 percent (quintile) of households, compared with 1 percent for the
middle quintile and 0.2 percent for the top quintile.
It’s an interesting thought, and one that should be considered. After all, once the tax credit expires, people will start getting smaller paychecks again. They’ll notice that. Of course, politically, that is one problem with automatically including a tax cut in a paycheck. People get used to it being there, and get used to the way things are. Once the Making Work Pay tax cut ends, though, people won’t see it as a return to normalcy. Instead, they’ll see it as a tax increase — even though it isn’t.