Does “Making Work Pay” Actually Make Work Pay, or Raise GDP?

The “Stimulus” law’s single most expensive provision was “Making Work Pay”. It is a $400 tax credit to persons with ANNUAL earnings in between $6452 and $75000, and lesser amounts for persons earning outside the range (reaching zero at $0 and $95000).

So this provision does encourage people to earn somewhere in between $6452 and $75000, rather than earning outside the range. In order to understand how that relates to “making work pay”, we need to know whether it does more to pull incomes down into that range from above, as opposed to pushing them up from below.

THE NATIONAL EMPLOYMENT RATE

One question is how many people earn zero for the year, but are on the margin for working. This is difficult to know exactly but, for example, the 2009 CPS demographic supplement says that 10 percent of men aged 25-54 in 2008 earned zero that year. Only 3 percent of men and women aged 25-54 in the labor force (but not necessarily working) in March 2009 had zero earnings for 2008. So let’s say that the number of persons who might consider changing their annual earnings from zero to a positive amount is equal to 5 percent of the labor force, or about 7.8 million people.

Another 20.5 million people had earnings between 0 and $6452 for calendar 2008. So we have a total of about 28 million people encourage to work, or work more.

8.4 million people earned between $75K and $95K in calendar 2008.

So clearly there are more people induced to earn more rather than less, and we can conclude that “making work pay” did push in the direction of raising the national employment rate (how much is a much more complicated question).

GDP

Note that the types of people encouraged to work more are different than the types of people encourage to work less, so it is possible that “making work pay” could reduce GDP even while it raises national employment.

The 8.4 million people earning $75K and $95K in calendar 2008 had an average income of $83K, as compared to $3K for those 20 million earning $1-6452 (who knows what the 7.8 million who earned zero would have earned if they had worked). Obviously, $400 seems like more to the latter group, and therefore would tend to motivate a greater change in hours or weeks worked for them: a rough adjustment for this compares the marginal tax rates for the two groups. The former group’s marginal tax rate was 2% (ie, they lost $20 of tax credit for every $1000 they earned), and the latter group’s was -6.2% (they gained 62 dollars of credit for every $1000 they earned).

So the income-weighted average marginal tax rate for the two groups was (8.4*83*.02 – 28*3*.062)/(8.4*83+28*3)= +1.1 percent. In other words, on net Making Work Pay probably REDUCED the supply of income, because its income-weighted average marginal tax rate was positive, rather than negative.

SUMMARY

In summary, a good guess says that “Making Work Pay” may have increased national employment and hours, but it is highly unlikely that it increased GDP. The Treasury cost of the program was not only the $116 billion budgeted, but also the loss of other tax revenues due to the net disincentive to earn.

About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

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