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2010 Budget Tax Proposal

Make Permanent the “Making Work Pay” Credit

The economic stimulus act ("American Recovery and Reinvestment Act of 2009," or ARRA) created the "Making Work Pay" (MWP) tax credit, an Obama campaign proposal to offsetpartof the Social Security taxes paid by low- and middle-income workers. The president proposes to make the credit permanent, index the maximum credit annually for inflation, and lower the phaseout rate from ARRA's 2 percent to 1.6 percent.

MWP provides a refundable tax credit equal to 6.2 percent of earnings (the employee share of the Social Security payroll tax), up to a maximum credit of $400 for individuals ($800 for couples). Neither nonresident aliens nor taxpayers claimed as dependents by others are eligible for the credit. Couples may claim the full $800 credit, even if only one spouse works.

Under ARRA, the credit phases out at a rate of 2 percent of income over $150,000 for married couples filing joint tax returns and $75,000 for others. Therefore, couples with income above $190,000 and others with income above $95,000 are not eligible to receive the credit. The president proposes to reduce the phaseout to 1.6 percent and to index the phaseout thresholds annually to take account of inflation.  The lower phaseout rate would widen by 25 percent the income range over which the credit phases out.

The credit would offset the regressivity of payroll taxes and encourage low-income people to work. Because workers in the phaseout range would face higher marginal tax rates, however, it could give those workers an incentive to work less.

MWP would reduce income taxes for three-fourths of all tax units in 2012 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 2.3 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.

Because the maximum credit would not be indexed, it would decline in real value over time.  As a result, the credit would provide a diminishing percentage increase in after-tax income in future years, even though indexing phaseout thresholds would maintain the real income range over which taxpayers could claim the credit.

Distribution tables
        Making Work Pay Credit
2012 versus current law by cash income
2012 versus current law by cash income percentiles
2012 versus Administration baseline by cash income
2012 versus Administration baseline by cash income percentiles

Additional Resources
Stimulus Act Report Card: "Making Work Pay" Tax Credit
Description of Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal; Part One: Individual Income Tax and Estate and Gift Tax Provisions (JCS-2-09), Joint Committee on Taxation, September 2009, pp 74-77