Governments around the world see the need to get people back to work and increase consumer confidence. Knowing that they need to act, they’re bailing out banks, insurance companies, and manufacturing industries, as well as helping high income taxpayers by reducing income taxes.
In the midst of the crisis, they’re ignoring the most effective way to increase jobs and consumer spending: End the destructive payroll tax, thereby helping the unemployed get jobs. When low and middle income families pay only their fair share of taxes, they’ll be able to spend more on the things they value, thus boosting the economy to grow in productive directions. That’s not happening because of the regressive payroll tax scheme.
The US reliance on payroll taxes discourages employers from hiring and workers from working:
- For most workers payroll taxes amount to 17 percent of salaries (high income workers pay less than that); this represents a huge disincentive to hiring people or to seeking a job,
- 3/4 of households pay more in payroll taxes than they do in personal income taxes,
- The taxes are now almost 40 percent of federal revenues; meaning that we’re increasingly running the government on the backs of the lowest income workers.
Payroll taxes reduce the things we do want: jobs, a healthy economy, individual and family health, spending based on real human needs, social justice. Meanwhile we give a free ride to things we don’t want: pollution, dependence on foreign oil, an unhealthy environment, foolish use of limited resources, increasing income divides.
Why not couple a reduction in payroll taxes with increased taxes on the things we don’t want? Hendrik Hertzberg, writing in the New Yorker (“Not insane”), argues that we need a package approach:
A whole good idea would be to make a payroll-tax holiday the first step in an orderly transition to scrapping the payroll tax altogether and replacing the lost revenue with a package of levies on things that, unlike jobs, we want less rather than more of—things like pollution, carbon emissions, oil imports, inefficient use of energy and natural resources, and excessive consumption. The net tax burden on the economy would be unchanged, but the shift in relative price signals would nudge investment from resource-intensive enterprises toward labor-intensive ones. This wouldn’t be just a tax adjustment. It would be an environmental program, an anti-global-warming program, a youth-employment (and anti-crime) program, and an energy program.
The bipartisan coalition Get America Working! emphasizes the fact that payroll taxes exacerbate the true unemployment of discouraged workers, with its consequent toll on both individuals and society:
America has one giant unused resource, its hidden unemployed. There are tens of millions of capable Americans who might seek employment if the job market was better, but who, believing that is impossible, do not look and therefore do not count as “unemployed”. They include many older Americans, women, young people, people with disabilities, minorities, and other chronically underemployed groups. Much of this lost opportunity is the result of ever-rising payroll taxes forcing up the cost of hiring.
The key to change is lowering the price of labor relative to that of the only other basic inputs in the economy—natural resources such as materials, energy and land. Eliminating the payroll tax alone could produce as many as 20 million new jobs. That would (1) profoundly enrich the lives and health of those who get the jobs; (2) power a sharp increase in the production of goods and services; (3) cut today’s enormous public and private costs of supporting so many dependents; and (4) sharply reduce the costs of many social dysfunctions – ranging from crime/violence/drugs to unmotivated students—caused by today’s massive true unemployment.