Flawed Approach: The Working Families Tax Cut Act as a Response to Inflation
Alex Brill, Kyle Pomerleau and Grant M. Seiter | AEIdeas
Earlier this week, Congresswomen Nicole Malliotakis (R-NY) and Michelle Steel (R-CA), who are both members of the House Committee on Ways and Means, introduced the Working Families Tax Cut Act. The bill would temporarily increase the standard deduction by $2,000 for single filers and $4,000 for married filers in 2024 and 2025. However, this increase would phase out for taxpayers with incomes over $200,000 ($400,000 for married couples filing jointly).
According to a committee press release, the bill aims to address the burden of high and sustained inflation resulting from pandemic-related fiscal stimulus and accommodative monetary policy by the Federal Reserve on middle-class families. “Americans can no longer keep up with price increases, which is why we’ve introduced this legislation to increase the standard deduction and allow millions of families to keep more of their hard-earned money,” noted Malliotakis.
While inflation has adversely affected households and the US economy as a whole, a temporary expansion of the standard deduction is a poorly designed policy response for several reasons.
First, any policy that increases household disposable income will contradict efforts to mitigate rising prices by increasing aggregate demand. Current monetary policy is attempting to slow aggregate demand by raising interest rates, and a policy that increases the deficit would further counter that effort.
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