President’s Proposed Tax Credit Designed by ECON Faculty

University of Maryland economists, Professors Melissa S. Kearney and Lesley J. Turner, developed the second earner tax credit proposed by President Obama at Tuesday's State of the Union address. Based on a December 2013 Hamilton Project paper and policy proposal by Kearney and Turner, Kearney outlined the paper and the policy proposal in person with President Obama over the summer, and said implementation of the credit would make a positive difference for U.S. families and for the economy. Download the full paper.

"I am absolutely thrilled to see the President propose a second earner credit. This is a simple fix to the tax code that would help address the unintentional, unfortunate second earner penalty inherent to the current U.S. system. The credit that the President is proposing is pro-work, pro-family, and targeted on low- and middle-income families. As such, it should earn widespread political appeal. It represents a step in the right direction and would offer economic relief to millions of working couples."

In their paper, Kearney and Turner illustrate how the family-based nature of the U.S. federal income tax system leads to a secondary earner penalty. Specifically, the tax and transfer system has an inherent second earner penalty that discourages work efforts and reduces the return to work for a second earner within a married couple. For families headed by a married couple, spousal income is pooled, and the first dollar of earnings by a spouse—or second earner —is taxed at the marginal tax rate of the last dollar earned by the primary worker. When children are present, a spouse’s work efforts often bring associated child-care costs, making the return to work even lower.

Kearney and Turner’s estimates suggest that under the current federal tax and transfer system, and assuming standard child-care costs, a family headed by a primary earner making $25,000 a year will take home less than 30% of a spouse’s earnings. To address this situation, the economists propose a secondary earner deduction for low- to moderate-income families. They show that this incremental modification to the tax code would increase disposable income for low to middle class families with two earners.

Kearney and Turner are among several members of UMD’s Department of Economics who directly inform U.S. economic policy discussions and decisions. Professor Katharine Abraham was recently a member of the President’s Council of Economic Advisers. The department’s chair, Dr. Maureen Cropper, has served as chair of the EPA Science Advisory Board Environmental Economics Advisory Committee and is a member of the National Academy of Sciences and a Research Associate of the National Bureau of Economic Research. To learn more, visit www.econ.umd.edu.

Published on Fri, Jan 23, 2015 - 1:36PM