The First Most Obvious Tax To Eliminate If You Want To Increase Employment: The Payroll Tax

It seems pretty obvious that the U.S. economy needs to create more jobs. So obvious that there’s an obvious fix that ought to be considered: elimination of payroll taxes. Taxation is necessary as the price of civilization but in the world of taxation it is axiomatic that what you tax you will get less of. So look at what you tax. Do you really want to tax employment?

Headlines on Dwindling Employment: Fewer and Lower-Paying Jobs

The headlines rolling in about national employment, or the lack thereof, make it clear the situation is sensationally bad and headed for worse. There aren’t enough jobs and the majority of those that exist need to be better paying At the meager rate that the U.S. economy is creating jobs, the relatively good job figures reflected by the uptick of jobs in the September jobs report (103,000 new jobs, better than the number of jobs added over the summer) will not be enough to keep pace with the growth in population. Consequently, if job creation only remains at this level, and there is reason to think it won’t even do that, the nation’s unemployment rate will not go down from 9.1 percent. That's already unacceptably high. If the job creation numbers return to where they have been recently the unemployment rate will rise.

The reason to think job creation figures could likely head down again is that real household income is declining and this, as previously pointed out in an earlier National Notice article, is likely to lead to a downward spiral, particularly as it cycles through real estate values that could be very similar to the dynamic during the first Great Depression.

Continuing High Unemployment Rate, Perhaps Headed Up

Here from the headlines:

The New York Times on the last job report: Adding Jobs, but Not Many, U.S. Economy Seems to Idle, by Motoka Rich, October 7, 2011

The economy is not growing fast enough to bring down the unemployment rate, which held steady at 9.1 percent in September. Local governments and school districts are cutting large numbers of workers. And about a third of the jobs added by the private sector last month were actually 45,000 Verizon workers who had been on strike during August and were simply returning to work.

American Public Radio’s Marketplace about the same report: Jobs added in September, By Mitchell Hartman, Friday, October 7, 2011. Marketplace's Mitchell Hartman interviewed economist Kevin Hassett at the American Enterprise Institute who thinks:

. . . . we'll plateau around 100,000 new jobs a month for the foreseeable future.

And he interviewed Harvard economist Lawrence Katz to conclude that this means “the unemployment rate won't budge and the six million long-term unemployed won't get back on the job,” or in Katz’s own words:

The modest job growth that we've seen is just about what you need to keep up with population growth. It's not enough to bring people back to work.

6.7 Percent- Falling Average Income

At the same time the Times is reporting about declining incomes that “between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent”: Recession Officially Over, U.S. Incomes Kept Falling, by Robert Pear, October 9, 2011:

In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found.

* * *

That reduction occurred even though the unemployment rate fell slightly, to 9.2 percent in June compared with 9.5 percent two years earlier. Two main forces appear to have held down pay: the number of people outside the labor force — neither working nor looking for work — has risen; and the hourly pay of employed people has failed to keep pace with inflation, as the prices of oil products and many foods have jumped.

During the recession itself, by contrast, wage gains outpaced inflation.

One reason pay has stagnated is that many people who lost their jobs in the recession — and remained out of work for months — have taken pay cuts in order to be hired again.

Here is the Times graph: Declining Household Income, October 9, 2011.

Eliminating or Reducing Payroll Taxes Means What?

Proposing to eliminate or reduce payroll taxes does not mean to eliminate income taxes or associated income tax withholding procedures. Instead the proposal is to eliminate or significantly reduce the cost of Social Security, Medicare and unemployment insurance.

Do it Long Term and Across the Board

Employment often is and needs to be a long-term relationship (among other things it is not always easy for employers to quickly fire people) so, to be meaningful, any reduction or elimination of these taxes would have to be long-term and assured and understood to be long-term when implemented. The adjustments should also be broad-based, applying to all workers: In other words the temptation to tinker around the margins and reduce taxes only for `newly-created’ or `added’ jobs should be rejected. That’s just too complicated and leads to all sorts of senseless and unhelpful accounting ruses to qualify.

Social Security Structure Remaining Intact

Elimination of these payroll taxes does not mean having to change the Social Security Trust structure. The same amounts would have to be deposited into the trust to keep it actuarially sound but the moneys would have to come from somewhere else. Payouts to retired workers who worked more years and earned more would still be greater, just as under the current system. That means that more payments would have to go into the system when the economy was booming and more workers were working, but isn’t this the exactly the kind of problem/challenge that it is good to have?

Medicare and Unemployment Insurance

By the same token, all that is good about or bad about the formulas pursuant to which money is set aside for Medicare or as unemployment insurance could remain intact, but to the extent that these formulae don’t make sense they could be changed. It does make sense to save against a rainy day and, when the economy is good, set aside funds for the payout of unemployment benefits in the future. But that doesn’t mean that an actuarial relationship can be exactly calibrated or that payout of unemployment benefits shouldn’t be continued when the economy is especially bad.

On the other hand, does it make sense that Medicare taxes should be based on employment at all, that employers should perceive the (future) provision of healthcare, generally, for persons over 65 (currently) to be a cost of employing additional workers? In fact, what proper relationship should there be between healthcare and employment at all? To the extent that healthcare (fostered by special tax treatment- i.e. by excluding employer-provided healthcare benefits from income taxation- or whatever) is viewed as an essential incident to employment then, healthcare costing what it does today, gums up the employment economy. It makes it much harder for employers and employees who are otherwise a good fit for each other to match up for the right reasons.

A Revenue Shortfall That Would Need To Be Addressed?

If payroll taxes were cut back wouldn’t a resulting shortfall in revenue need to be addressed? Yes, in the long term. (Economists are diagnosing the economy to be troubled by a lack of consumer demand so pumping income into consumers’ pockets without addressing it immediately might make sense right now.) But it would not necessarily need to be addressed in the immediate term, during a bad economy, when we are deficit financing all sorts of other things like the Afghanistan and Iraq wars.

Where would the foregone payroll taxes be made up? Anywhere that makes sense. Arguments are being made that the wealthy, the corporations, and the profits they are making should not be taxed because they are the nation’s self-described “job creators” even if, when given the opportunity, they choose to do other things with their extra cash rather than create jobs. Instead of trying to create jobs by not taxing income flowing to wealthy theoretical job creators, it makes sense simply to tax actual job creation less by eliminating payroll taxes.

Payroll Taxes vs. Income Taxes: The Wealthy vs. the Rest of Us

What if it was decided that the resulting shortfall in revenue could be made up nowhere except by an increase in income taxes? Would increased income taxes wind up being essentially just a reversal of the cut on payroll taxes? Are payroll taxes just the same as income taxes? No: Income taxes include taxes on capital gains and investment income. Further, income taxes can and should be progressive with the wealthier paying at a higher rate than the poor and middle class. Payroll taxes are regressive with the poor and middle class paying a higher percentage of their taxed pay than the wealthy.

Don’t taxes on income, like taxes on payroll, result in less employment when people don't seek employment because the salary paid in income will be taxed? Are income taxes paid by an employee securing employment the same as payroll taxes that must be paid by an employer providing that employee employment? . . .

. . . That can get into the lengthy and abstruse arguments economists engage in when they debate where the “incidence” of a tax (or subsidy) falls, who actually pays a tax when a transaction between two parties is made subject to that tax whether or not one or the other party is nominally considered responsible for paying it. But, the ultimate answer is complicated and also tied up with complex psychology. Among other things the employee is for various reasons likely to value a job for the sake of the job itself, not just the income. Even when income is taxed progressively at a higher rate at the higher end of the spectrum it is doubtful that an individual would want to be significantly less successful or productive just because he was paying more taxes.

Obama Has Suggested Lower Payroll Taxes

Obama has proposed temporarily cutting payroll taxes. (Remember it was suggested above that to be effective any such cut should be long-term.) One might consider that Obama's proposal has, to date, been under-reported and under-analyzed. For more on this see:

Obama Challenges Congress on Job Plan, by Mark Landler, September 8, 2011

Old Tax Relief Seen as Anchor in Obama Plan, by Jackie Calmes, September 6, 2011

September 14, 2011, How Payroll Tax Cuts Can Create Jobs, by Casey B. Mulligan

News Analysis, Plan’s Focus on Social Security Taxes Reflects Its Modest Ambitions, by Binyamin Applebaum, September 8, 2011

Politifact: Barack Obama on Monday, September 5th, 2011 in a Labor Day speech in Detroit: Barack Obama says payroll tax cut has boosted average family income by $1,000

Former Labor Secretary Robert Reich has weighed in with a brief article supporting a reduction of payroll taxes although the precision with which he suggests parameters is perhaps somewhat limiting to the imagination: Reich: Eliminate payroll taxes to improve economy, Marketplace, Wednesday, August 25, 2010.

Why Does the Republican Opposition Dislike Reducing These Taxes?

President Obama has tweaked the Republican opposition for being philosophically inconsistent in not supporting lower payroll taxes: After all, aren’t these Republican supposed to be opposed to taxes in general, even routinely signing on to anti-oaths?

There are reasons for the Republican opposition to oppose reduction of the payroll tax, reasons other than that they want to reflexively oppose Obama about everything, and beyond the fact that many Republican's likely have no interest in seeing the economy improve before the upcoming general election. Here are two points. (Does it let the cat out of bag to offer this analysis that others don’t seem to be offering elsewhere?)

One reason for Republicans to oppose payroll tax elimination is that a shift away from dependence on payroll tax revenue could result in a shift that winds up with lower taxes on most low- and middle-income wage earners and higher taxes on the income of the wealthy, replacing regressive payroll taxes with more progressive taxes on investments and capital gains.

The other reason the elite of Republican party leadership likely don’t want such a change in the payroll tax system is that there are many within the party who have their eye on handing a gift to Wall Street by unwinding Social Security and redirecting to Wall Street the contributions that are currently paid into the Social Security Trust Fund. Turning the investment of these vast sums over to Wall Street's brokers would be a much more expensive system than we have now, ridden with risks and a potential for fraud that doesn’t currently exist. That, however, is what some Republicans have their eyes on. If payments currently going into the trust fund became untethered from the payroll tax payments that now come in from individual workers (and were replaced with deposits that clearly came directly from government), Republicans would have a much harder time arguing for and trying to implement their desired switch over to a Wall Street benefit-based system.

Not a Panacea, Only a Start

While reduction or elimination of payroll taxes is the first most obvious tax to eliminate to increase employment, it would not be a panacea. It would not be a panacea because of the structural problems that need to be addressed in the American economy today. But to the extent that some of those problems are tied in with an increasingly skewed distribution of wealth it might begin to address at least some of those structural problems. Historically, skewed distribution of wealth and a lack of regulation of the activities of the wealthy and the financial sector have accompanied significant economic downturns like the Great Depression. We’ll have to leave off here though. The country’s ability to address its problems through versatility, innovation and the generation of new industries when it is faced with the increasing prevalence of lumbering (government-assisted) conglomerates and monopolies is a discussion for another day.