Nobody From Nowhere (@i8dc)

Occasional Common Sense

To Reduce Unemployment, Just Raise Tax Rates!

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All we have to do to reduce unemployment is raise individual income tax rates across the board.

Okay, no, I’m not saying that raising tax rates in isolation would lead to lower unemployment.  That would be dumb, kind of like claiming that reducing government deficits would cause unemployment to fall.  Kind of like arguing that lowering today’s tax rates would lead to higher tax revenues.  Kind of like saying that Paul Revere rang bells and fired his musket while on his midnight ride.

Like I said – dumb.

But here’s how to encourage more hiring by the private sector: eliminate the employer’s side of payroll taxes. 

This would reduce the employer’s cost of employing workers, leading to higher employment as the labor cost curve shifts down.

To recoup the lost revenue, raise taxes on individuals. The good news here is that wages would rise, as employers would use their rebated 7.65% to compete for employees.  How much of this would go to wages in the new equilibrium?  Paul Ryan, in his speech attacking prospective Obama tax increases, said that 59% of the employer’s Medicare tax would be paid to employees if not for the tax.  Applying this percentage to the full 7.65% means salaries under the $106,800 Social Security wage ceiling would rise by 4.48%.  So the employee’s payroll tax could be replaced by increasing income taxes 4.48% to 12.13% on incomes under $106,800 and after-tax income would be unchanged.

However, even with the higher employment that should result from the change, the income tax increase on the employee side wouldn’t replace the revenue lost by eliminating employers payroll taxes. So instead, since we’re radically changing these entitlement taxes on the employer’s side, let’s radically change them on the individual side.

In 2008, wage income totaled approximately $6.852 trillion, approximately $1.431 trillion of which was subject only to the Medicare tax (it was income in excess of the $106,800 individual Social Security tax ceiling).  Using Ryan’s multiplier of 59% of payroll taxes, these wages would have been $7.366 trillion if not for the employers’ payroll taxes (employers would have retained $357 billion for other purposes, including dividends, debt repayment, and other factors of production).  Assigning a notional 2% increase in all wage levels due to more hiring by businesses increases this figure to $7.513 trillion.  If all wage income had been subject to the Social Security tax, an 11.6% tax  would have collected the same $871 billion in payroll tax revenue collected in 2010.  This would lower the tax on all income under $106,800, and would add 9.3 points of tax on incomes greater than $106,800.

But let’s take this a step further.  Let’s change the taxes for Social Security and Medicare to general income taxes rather than payroll taxes. Using the adjusted wage income from above and adding in non-wage income, payroll taxes could be replaced by a 9.5% tax on all individual income.

Unmarried, wage income

Current

Proposed

Clinton-Era

$20,000

22.1%

19.5%

27.1%

$40,000

27.1%

24.5%

40.1%

$70,000

37.1%

34.5%

40.1%

$100,000

40.1%

37.5%

43.1%

$175,000

30.3%

37.5%

33.3%

$300,000

35.3%

42.5%

38.3%

$1,000,000

37.3%

44.5%

41.9%

The “current” column is the sum of current marginal income and payroll tax rates, using Ryan’s formula for net payroll tax.   The “Proposed” column is the current income tax rate plus 9.5% to replace payroll taxes.  The scheme above would result in tax cuts on all income under $106,800, and a significant tax increase on income above that.  It would also return progressivity to combined federal tax rates between the middle and upper classes, which hasn’t existed since 1986.

The rates on the top end are high, but they’re not far off the Clinton-era rates.  And don’t forget the extra retained corporate earnings of $357 billion (about 3.9% of all personal income), the beneficiaries of which are overwhelmingly at the top end of the income spectrum.

Note that this analysis is hardly rigorous, and I’m sure certain supply-siders would whine about dynamic scoring if they were ever to come across this blog.  I’d be curious to see what more qualified economists have done or could do in this area.

Bottom line though – we can reduce unemployment by raising taxes.

-+-+-+-+-

Useful links:

http://www.cbo.gov/ftpdocs/69xx/doc6902/11-28-CorporateTax.pdf

http://www.smartmoney.com/invest/markets/high-corporate-tax-rate-is-misleading-22463/

http://www.socialsecurity.gov/oact/trsum/index.html

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Unmarried

Current

New

$20,000

22.13%

20%

$40,000

25.73%

25%

$70,000

35.73%

35%

$100,000

40.13%

38%

$175,000

30.3%

38%

$300,000

35.3%

43%

$1,000,000

37.3%

45%

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Written by David Clayton

June 14, 2011 at 6:08 pm

Posted in Punditry

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