Our extremely polarized, partisan and deeply divided political system will not likely agree anytime soon upon any large, new and direct federal stimulus programs no matter how high the unemployment rate goes or how long it persists. Many taxpayers and our elected representatives hold a deep psychological bias against all government programs – particularly those that cost hundreds of billions of dollars and that likely will take years to implement and have positive effects on our nation’s economy, public infrastructure, and social systems.
HISTORICAL PREFERENCE FOR USING THE TAX CODE
For most of the past 30 years, we have principally determined our national economic, urban, energy, transportation, housing, social, environmental, and healthcare policies through our tax system. In a continuously bi-partisan fashion, we have created many new tax credits, deductions, exemptions, and other surreptitious rules and regulations to create entire government programs indirectly through our massively complex and lengthy tax code.
Members of Congress often reward large campaign contributors with special tax provisions that are so artfully written as to favor specific enterprises without actually mentioning any by name. These tax provisions far exceed in total federal revenue lost and create more “waste” than the 1% of the total annual federal budget that constitutes the many specific Congressional spending “earmarks” which are additional surreptitious expenses to the federal government and all taxpayers.
The ultimate result with respect to the federal deficit remain the same whether we prefer tax cuts or direct public programs. We generally prefer tax cuts that reduce revenues to direct spending that increase expenditures. These slightly irrational political and national psychological preferences have maintained the permanent systemic gap between federal revenues (18% of GDP) and federal expenditures (21% of GDP) for the past 30 years.
The proposed complex and complicated tax credits to encourage new private sector jobs would be bureaucratic paperwork nightmares solely designed for large-scale fraud and abuse. However there is one simple tax change that might be more economically stimulating than most others, and it might garner bi-partisan support to ensure prompt passage and implementation.
PAYROLL TAXES AT THE BOTTOM OF THE INCOME PYRAMID
Many low-income taxpayers pay more in payroll taxes for Social Security and Medicare than they pay in standard income taxes. Just as income stratification has grown, so has the overall split between income tax contributions between the very rich and very poor. Coupled with the earned income credit dating from the Reagan years, many of our poorest people do not even pay any payroll taxes.
Payroll taxes are imposed on a flat-rate basis upon total earned income by individuals. Income taxes are assessed upon progressive marginal tax rates based upon a calculated adjusted gross income (AGI). Income taxes are imposed on both individuals and separate taxable business entities. In calculating AGI, there is no reduction for federal payroll taxes paid but for many other itemized personal and business expenses. Many businesses pass-thru their incomes and expenses to be taxed at the individual level and applicable lower rates. Tax credits reduce final calculated taxes whether they are payroll, income, or both.
Most conservatives and liberals could likely agree that any single taxpayer must earn at least $1,000 a month or up to $2,000 a month for a family of four, in order to meet basic American living expenses in most cities. These annualized amounts ($12,000 & $24,000 respectively) closely parallel the very low numbers established by the Department of Health & Human Services with respect to the Federal Poverty Rate as based upon a formula originally determined during the mid 1960’s. Any and all federal taxes imposed on taxpayers earning less than these levels would be heavy financial and social burdens. That concept lead to the creation during the early 1980’s of the earned income credit which is probably the simplest and most direct and effective means of pulling many people out of poverty. Today however, very high official and unofficial unemployment is pushing many families back into poverty.
NEW PAYROLL TAX EXCLUSION
The U.S. needs to get the private sector hiring again – promptly and in large numbers. Employers currently match their employees’ automatic payroll contributions to Social Security and Medicare dollar for dollar out of their own gross revenues. Self-employed people have to pay both contributions and that is arguably a major tax burden on many individuals struggling to make any 1099 income in this deep recession. If through the earned income tax credit, many people at the bottom of the income scale effectively do not pay any income or payroll taxes, why bother collecting some of those taxes in the first place?
We should exclude at least the first $6,000 in earned income of every worker from all social security and Medicare taxes. In addition, all employers and self-employed individuals would not have to match those taxes for the first $6,000 in income. Anyone earning just $500 a month would likely qualify for the earned income credit if there were any dependents involved.
All employers and self-employed people could do whatever they wanted with the money they would no longer have to send to the U.S. Treasury on a quarterly basis. This exclusion could be extended up to $12,000 a year and still parallel the Federal Poverty Rates and the applicable rules for the earned income tax credit.
This tax exclusion could be a temporary measure lasting from 2 to 4 years until the economy is completely out of recession, or it could be a permanent tax change. Workers would still be credited with these excluded amounts for determining eligibility for and future monthly payments under social security.
This program would start January 1, 2010 so that all new employees would not have any payroll taxes collected until they earned more than $6,000 during next year. If a higher annual full-time salary were offered to new hires, the savings could be pro-rated over the entire year. For existing workers in a company, this new exemption would also be pro-rated over 2010 and all subsequent years. For example, a salaried person earning $40,000 a year would pay payroll taxes and the company would match them on the basis of only $34,000 in gross income.
QUICK STIMULUS EFFECT ON BUSINESSES & INDIVIDUALS
Some businesses might use the cash savings to pay down debt or give bonuses to top executives. Others might use it to purchase needed equipment. But many businesses would likely use the extra cash to increase the hours of part-time workers to full-time status, or even add a few new jobs to cover various projects they need to accomplish. However due to this deep recession they simply do not have the extra cash from sales and other revenues to support such new employee commitments. The cost of hiring someone new would be significantly lowered if an employer would not have to make matching payroll tax contributions on the first $6,000 of earned income.
Under this proposal, every employee in the U.S. would get an extra $459 a year to save or spend. Every employer would see matching payroll tax contributions reduced by $459 per employee. This would quickly start to multiply to a sizeable amount to permit additional payroll spending based upon the total number of employees on the company’s payroll. Self-employed individuals would see a total of $918 a year in extra cash to grow their small businesses. These numbers would be doubled if the payroll tax exclusion were set at $12,000 annually.
This tax change could generate many new full and part-time private sector jobs that could serve as important internships in various fields for many unemployed people. Often workers can only gain the necessary new experience and skills while actually working. Companies could work with new part-time employees around their school schedules and childcare responsibilities.
This proposal would not create any new federal program, it would not permit government bureaucrats to pick and choose any economic winners in the private sector, and it would leave all the hiring decisions to the private sector. There would be no special paperwork except employers would see a modified federal payroll tax form to complete. The best objective measure of the program’s success over 2010 and beyond would be simply tracking the increases in private sector hiring and any decreases in the overall unemployment rate.
OTHER COMPLIMENTARY FEDERAL TAX & DIRECT SPENDING PROPOSALS FOR NEW JOB CREATION
This tax exemption at the bottom end of the income scale could be partially offset by making the 6.2% Social Security tax rate applicable to all earned income instead of arbitrarily cutting it off at $106,800. Medicare’s 1.45% payroll tax rate applies to all earned income. These flat payroll tax rates could also be made slightly progressive by marginally raising them to 7% and 2% respectively for gross earned incomes including bonuses and commissions that total over $150,000 annually, or some other politically acceptable amount.
NATIONAL PUBLIC-PRIVATE INTERNSHIP PROGRAM
I previously discussed in a prior post dated 11/20/09 a modified and updated CETA (Comprehensive Employment & Training Act) program from the 1970’s renamed the National Internship Program (NIP). Federal subsidies coupled with an independently-controlled new nationwide Internet Jobs Bank would match unemployed workers and students with all types of jobs and internships within public entities and private companies lasting from 1 month up to 2 years that would replace most unemployment compensation programs. The NIP program could also be started quickly but it would cost between $20 and $30 Billion a year to place 1 million people in full and part-time jobs paying from $10 to $15 an hour. A 2-year NIP placing up to 10 million people in various public and private sector internship jobs could total around $500 Billion.
LONG-TERM INFRASTRUCTURE SPENDING NEEDED
Most Federal spending for infrastructure expenditures will take years to materialize as many worthwhile projects will take some time to plan, meet regulatory requirements, engineer, design, and finally build. This is not an argument that we should continue to ignore these long-neglected public needs but merely a realization that they will not have an effect on the U.S. economy during the next 2 years. Instead they are worthwhile long-term expenditures.
In 2005, the American Society of Civil Engineers (ASCE) stated that the U.S. would need to spend at least $1.6 trillion to bring our long-neglected roads, highways, bridges and dams into safe and adequate shape for current and projected future needs. The U.S. spends only 2.4% of its GDP on infrastructure, as opposed to 5% in Europe and 9% in China. The many proposed new urban light rail lines, and numerous conventional and high speed rail projects would total an addition $290 to $400 billion nationwide to the ASCE total estimates.
There have been several proposals for an independently-controlled National Infrastructure Bank (NIB) to review and select major regional development projects for funding removed from the political process. Just getting politicians of both parties to give up such spending control will be a big challenge. However, there are many water & sewer systems, roads, bridges, highways, dams, airports, seaports, mass transit, conventional and high speed rail lines, electrical energy distribution grids, and large renewable power plants that we must begin planning, designing and funding as soon as possible. However, even with the NIB issuing tax-free bonds and reselling them on the open market, Congress must finally determine a specific public funding source and a mix of new taxes to actually pay for these long-term investment bonds as issued by the NIB. So far, none of the current proposals for the NIB even address this fundamental funding issue.
This modest tax exemption proposal could be the simplest, fastest, least complex and most politically acceptable means of creating some new desperately-needed private sector jobs.
Marc Pascal in Phoenix, AZ can be reached at [email protected].