Analyst: Ditch Payroll Tax Cut, Bring Back Stimulus Credit

Shown here is a 1040 individual tax return. (AP)

As Congress wrangles over how and whether to extend the payroll tax cut, a prominent budget analyst is urging Washington to scrap the plan altogether and return to the stimulus-era credit that the payroll tax cut replaced.

Roberton Williams, a senior fellow with the Tax Policy Center, this week called on lawmakers to revive the so-called Making Work Pay tax credit in lieu of continuing the payroll provision.

The credit was the tax benefit for working-class families included in the 2009 stimulus. Congress did not extend the credit at the end of 2010, voting instead to approve a 2-point reduction in the payroll tax.

Williams argued at the time that the tax-cut swap would end up hurting the working poor, claiming the stimulus credit was more valuable for them than the payroll provision. Now that the payroll tax cut is set to expire, Williams said Congress should seize the opportunity to reverse course and bring back Making Work Pay.

"It's got more bang for the buck because it directs more money to people who will spend it," he told FoxNews.com.

The logic behind Williams' argument is as follows:

The stimulus credit gave single workers up to $400 a year, and couples up to $800. Many workers got the full amount, provided they reported a nominal income over the course of the year.

By contrast, the value of the payroll tax cut depends entirely on the size of a taxpayer's income.

The more they make, the more it's worth -- and vice-versa. For instance, it would be worth $2,000 for someone earning $100,000. But for someone earning $10,000, it would be worth just $200 -- less than the same taxpayer would have received under Making Work Pay.

The Tax Policy Center estimated last year that roughly 51 million households would be negatively affected by the expiration of the Making Work Pay credit.

Williams said on a dollar-for-dollar basis, the Making Work Pay credit is more effective. He recommended reviving it, and doubling it so it's worth $800 for single filers and $1,600 for joint filers.

But, Williams conceded, the Making Work Pay cut is not currently on the table in Congress.

That debate focuses exclusively on what to do with the payroll tax cut -- whether it'll be worth $1,000 for the average family or $1,500; whether it will apply to employers or just employees; whether the wealthy should foot the bill for the extension; and whether another temporary extension absent fundamental tax reform is even a good idea.

At the Cato Institute, senior fellow Dan Mitchell said both the stimulus credit and the payroll tax cut have their flaws -- for starters, they're both temporary.

But he argued that the payroll tax cut still is probably a better deal for the economy since it lowers marginal tax rates. He suggested the payroll provision, though temporary, might still do more to spur hiring.

"I'm not a huge fan of either, but to the extent that you want economic growth and job creation, the payroll tax cut is better," he said.