President Barack Obama's "Making Work Pay" tax credit is a major
piece of the fiscal stimulus plan currently being debated in
Congress. The new credit is being touted as a tax cut, but in
reality it is just more spending through the tax code. Moreover,
since it is also "refundable," it would send money directly to
low-income taxpayers who pay no income taxes.
This Making Work Pay credit does nothing to create jobs. A
better approach would be growth-promoting tax cuts that increase
taxpayers' incentives to work, save, invest, and take on risk. The
best way to do that is to lower rates on individual income, capital
gains, and corporate taxes and to eliminate the death tax.
Spending Through the Tax Code
The Making Work Pay credit would fulfill President Obama's
campaign promise to cut taxes for 95 percent of working families.
It is worth $500 for an individual or $1,000 for a couple. The
credit is refundable, so if it is greater than the total that the
taxpayer owes in income taxes, they will get a check from the
government for the remaining amount of the credit. For instance, if
a couple has an income tax liability of $800 (after all other
credits and deductions in the tax code), the new Making Work Pay
credit would completely wipe out their tax liability. Then, they
would receive a $200 check from the IRS from the refundable portion
of the credit.
This kind of credit is actually a spending program because it
directs money to a targeted group based on political
considerations. Economically, it is no different than if Congress
passed a spending bill that simply sent checks in the same amount
to the same people. The only difference is that it is run through
the tax code.
Using the tax code for this kind of spending is favored
politically because spending is unpopular with the American public.
Tax cuts, however, are popular. This misleading brand of spending
as a tax cut gives lawmakers a freer hand to institute, through the
tax code, the same programs that would be unpopular if rightly
called spending. Moreover, spending through the tax code is a
stealth off-budget expansion of the federal government and
circumvents the standard budgetary process where spending would
ordinarily receive intense scrutiny.
Paying Those Who Pay No Income
The Making Work Pay credit will send money directly to millions
of taxpayers who pay no income taxes at all. It is impossible to
cut taxes for a taxpayer who pays no taxes. Thus, refunds to
taxpayers who pay no income taxes cannot, by definition, be a tax
cut. This is spending pure and simple, and it is misleading to
In 2009 alone, the IRS will already mail checks worth an
estimated $57.8 billion to taxpayers who pay no income taxes but
still get a refund from the two largest refundable credits--the
Earned Income Tax credit and the Child Tax Credit.
The tax code should not be used to direct payments to targeted
groups. The merits of such programs should be discussed and debated
in the budgeting process instead of obscured in the tax code and
misnamed a tax cut. This would increase the transparency of
government and give taxpayers a better sense of how their money is
Credits Reward Politically Favored
More tax credits in addition to the Making Work Pay credit are
likely to be proposed in the near future. It is important to
remember that tax credits are often misused to influence behavior
and achieve political goals. This is not a new development, as the
very first income tax in 1913 had a deduction for interest paid to
encourage home ownership. Tax credits designed to influence
behavior are not tax cuts, however. They are social or political
policy implemented through the tax code. If taxpayers must
undertake a certain behavior to receive a reduction of their tax
bills, they are being paid to engage in a politically favored
There are already countless provisions in the tax code that pay
taxpayers to engage in behavior deemed beneficial by Washington.
The federal government spends almost $1 trillion annually through
161 different credits or deductions for education, energy
production, energy use, the environment, agriculture, housing,
transportation, community development, health care, and many
others. These are no different economically than if the government
directly paid taxpayers through spending programs to undertake the
politically favored activities. Such policies, therefore, should be
regarded for what they are: spending, not tax cuts.
Thus, the Making Work Pay credit is another step down an
increasingly slippery slope.
Making Work Pay credit Will Not Boost
The Making Work Pay credit, or any new credit, will fail to
stimulate the economy because government spending cannot create new
purchasing power out of thin air. The money that would go out
through this credit would have to be taken out of the private
sector by either taxing or borrowing, negating any effect of new
government spending. The only sure way to stimulate the economy is
through permanently lower tax rates, because they improve
taxpayers' incentives to create income through working, saving, and
The Heritage Foundation recently released a plan that would
create 3.6 million jobs through 2012 by lowering tax rates. The
plan calls for making the 2001 and 2003 tax cuts permanent, an
additional cut of 10 percentage points in the top individual income
and corporate income tax rates, and reductions of other income tax
rates by similar amounts from their current levels. The plan would cost
less than half of the current stimulus package, would actually
create new private sector jobs, and would really be a tax cut.
Spending in Disguise
Congress should do away with the Making Work Pay credit, but at
the very least it should limit its damage by making the credit
non-refundable. Not only would this prevent non-taxpayers from
getting government handouts through the tax code, but it would also
reverse the trend of using the tax code as a spending
The Making Work Pay tax credit now in the stimulus is not a tax
cut at all. It is spending through the tax code. It will function
like a spending program and send checks to taxpayers who pay no
income taxes. Even worse, it will not stimulate the economy.
Lawmakers should focus instead on real tax cuts such as cutting tax
Curtis S. Dubay is a Senior
Analyst in Tax Policy in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.