Intuitive Yet Still Fascinating

28 01 2009

The Center on Tax Policy provides the following assessment of the “Making Work Pay Tax Credit” provision in the House version of the stimulus plan.

This proposal gets high marks for timeliness, assuming it is implemented as an adjustment to tax withholding, and that mechanism would also maximize the chances that the credit would be spent rather than saved. As a refundable tax credit, the proposal would aid many low-income workers who are most likely to spend the money. However, the credit would also be available to many higher-income workers who are less likely to spend the additional income. Were the credit better targeted, it would have been graded an A.

CTP explains why:

Evidence from behavioral economics suggests that taxpayers view small increments to after-tax pay as income, to be spent, whereas they tend to view lump-sum payments as wealth, to be saved.

Well, its intuitive depending on where you fall on the political spectrum.

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