A Payroll Tax Break for Jobs
U.S. Senators Charles E. Schumer and Orrin G Hatch
New York Times, January 25th 2010
WITH the national unemployment rate at 10 percent, and more than 15 million Americans looking for work, ideas to spur job creation are at the forefront of everyone’s minds. While we may represent different political philosophies, we recognize that high unemployment — particularly long-term unemployment — is not a liberal problem or a conservative problem; it’s a national problem that takes a huge toll on families.
The idea for some sort of jobs tax credit is percolating again, but the jobs credit that existed in the late 1970s was of limited success, and it was excruciatingly complicated. Recalling this experience, members of Congress from both parties have been lukewarm to such a credit, and the idea was dropped from the stimulus package last year.
We have an idea that is simple, straightforward and easy to explain and administer. In fact, it is so simple that the legislative text of the proposal is only a few pages long — a rarity when it comes to tax policy.
Here’s the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That’s it. Simple to understand, and easy to explain.
The beauty of this proposal goes beyond its simplicity. Unlike a jobs tax credit of a specific dollar amount, this credit is “front-loaded” in that it provides an incentive for businesses to hire workers earlier in the year — because the tax benefit will be greater. A $60,000 worker hired on Feb. 1 will save a business about $3,400 in taxes, while that same worker hired on May 1 will save it about $2,500.
Unlike some versions of a payroll-tax holiday, which provide a much bigger benefit for higher-paid workers, this proposal is not biased toward either low-wage or high-wage workers. Yes, if you pay people more, you save more in taxes — but the savings as a percentage of pay remains constant. Under this plan, a business saves 6.2 percent on both a $40,000 worker and a $90,000 worker.
In the current environment, no business wants to wait until 2011 to receive a tax credit for someone it hires today. Another obvious benefit of this proposal to forgive payroll taxes is that it keeps money in a business’s pockets, since the tax is simply not collected in the first place.
In addition, because the benefit starts on the date of hiring and does not have an arbitrary cap, more businesses will want to use it. And since it is an elimination of the employer’s share of the Social Security tax for these workers — rather than a fixed or capped dollar amount — the complexities of making the incentive work with a firm’s payroll software are greatly reduced because employers will know simply to zero out the tax for these workers.
To promote long-term employment as the recovery gains steam, we would also add the following bonus: For any eligible employee kept on payroll for a continuous 52 weeks, the employer would receive an additional $1,000 credit on its 2011 tax return. (This would apply to any worker hired in 2010.)
Our two-pronged approach would be a far more efficient use of taxpayer dollars than other proposals under discussion, all of which could cost many times more with very little guaranteed improvement in unemployment.
Imagine that three million unemployed workers were to be hired this year under our plan. If they all worked an average of six months in 2010 at a salary of $50,000, and every single one stayed on payroll for 52 consecutive weeks into 2011, the gross cost of the Social Security tax cut and the additional credit would be only $7.6 billion. And that’s before we consider the offsets from income and payroll taxes paid by these workers.
There are some additional rules that would have to be put in place. For example, eligible workers would have to be hired for a minimum of 30 hours per week, and workers who are family members of the employer would not be eligible. The payroll tax reduction would be for private-sector jobs only; new jobs that are created by tax dollars in the first place would not be eligible. And any employer with a lower total payroll in 2010 than it had in 2009 would have to forfeit the benefit — businesses shouldn’t be allowed to shed jobs and still receive a tax benefit.
We urge Congress and President Obama to consider this idea to help jumpstart hiring and turn our focus back on jobs.