If We Give Everybody Cash, Let’s Tax It

Giving people cash is a great way to soften COVID-19’s economic blow. But it’s sparked a classic debate. Should the federal government give money to everyone? Or target it to people with low incomes?

Targeting has the potential to deliver the biggest benefit per dollar spent. But eligibility requirements add complexity and will inevitably screen out some people who need help. Universality is simpler and recognizes that we are all in this together.

Happily, we can combine the best features of both approaches: Let’s give cash to everyone, and then tax it later. By distributing money today, we get the speed and inclusiveness of universality. By taxing it later, we can recapture some of the benefits from those who needed them least.

One approach is simply to tax the assistance just like any other income. A person with little income this year would keep the full government payment of, say, $1,000. But a billionaire in California would net only $500. At tax time next year, Uncle Sam would get $370 back and California would get $130. The billionaire would receive half as much as the person with little income. And states with income taxes would get a much-needed boost in revenues.

Ben Ritz of the Progressive Policy Institute has proposed another approach: structuring the money as a pre-paid tax credit and then clawing back some of it at tax time. The clawback system could be designed to accomplish any distributional and fiscal goal you want. For example, you might phase out the credit entirely for folks earning more than $150,000. Another possibility would be to link the credit amount to some measure of income loss, not just income level, by comparing the income changes across tax years.

Any of these approaches would reduce the fiscal cost of the cash payments and thus, for the same overall cost, allow them to be bigger for those who get them. Taxing the payments as income, for example, might create a 11 percent offset in new federal revenues. (That figure is based on a report Elaine Maag and I did on carbon dividends, an idea for universal payments linked to a carbon tax.) A taxable payment of $1,125 would then have the about same net fiscal cost as an untaxed $1,000 payment. Under Ritz’s proposal, a more aggressive clawback approach could allow even bigger payments for the same overall cost.

The payments described here should not be treated as income in determining eligibility and benefits in safety net programs. They should be treated as income if we were enacting universal payments in normal times. But times are decidedly not normal. There is no reason for these temporary payments to reduce the efficacy of the existing safety net.

I favor targeting assistance to people with low incomes or sudden income loss if it’s easy to do so. There’s clearly more bang per buck in directing aid to those who likely need it most. Australia has already enacted one program along those lines. But if we go with universal payments, let’s make the payments taxable.