Association for Public Policy Analysis & Management

Background: When a recession hits, the federal government usually responds with tax cuts and additional financial assistance, because automatic policies built into the law often prove inadequate and elected officials need and want to respond to the crisis.

Research Question: How are benefits from different interventions distributed across the population? This paper compares the distributional effects of five fiscal policies aimed specifically at workers: Unemployment Insurance, the Making Work Pay (MWP) tax credit in effect 2009 and 2010, a 2-percentage point payroll tax cut like that in effect from 2011-2012, a hypothetical modified Making Work Pay tax credit with a larger benefit but shorter phase-out range than the original MWP credit, and a temporary 50 percent expansion to the Earned Income Tax Credit (EITC).

Data/Methods: We use the Tax Policy Center’s microsimulation model to individually simulate each policy design for the year 2011, when the national unemployment rate was still high at 8.9 percent. We measure the average benefit available to households by quintile under each policy to estimate the amount of financial support available to beneficiaries. We measure how progressive each policy is by examining the share of benefits going to each income quintile. We estimate the total cost for each policy.

Preliminary Findings: We find Unemployment Insurance to be the most targeted of the policies—providing the highest average benefits for every quintile, but to a small number of beneficiaries. The four simulated tax policies provide lower average benefits to a broader set of beneficiaries. The temporary payroll tax cut was the costliest and least progressive of the policies, while most other policies concentrated most benefits on the second and middle income quintiles. The expanded EITC was the most progressive policy, providing nearly 80 percent of all benefits to the bottom 40 percent of households.

Significance: It is likely that lawmakers will consider tax-based responses to the next recession and will look closely at MWP and payroll tax cuts used during the Great Recession. Understanding the distributional consequences of different policy designs can help policymakers to respond more effectively to economic downturns. Policymakers could even consider making available temporary stimulus tax credits in response to statewide or regional downturns that might not extend to the entire country.