This week Obama proposed a payroll tax cut of 2%, or $120 billion, claiming it would create jobs. What follows is an explanation why a payroll tax cut won’t create jobs, but a payroll tax increase—levied on the wealthiest 1% households and investors—could create 6 million jobs while simultaneously saving the 3.4 million homeowners faced with foreclosure in 2010.
First, some background. There are approximately 115 million taxpaying households in the U.S. The wealthiest 1%, or 741,000 households, appropriate for themselves about 24% of all the annual income in the U.S. each year, according to analyses of the IRS data by economists at the University of California, Berkeley. This is up from 8% of total U.S. income three decades ago.
The income of these wealthiest 1%/741,000 households is not ‘earned’ in the form of wages or salaries, but is obtained from dividends, capital gains, interest, rent, etc. This income is exempt from the 12.4% payroll tax, whereas wages and salaries earned by the bottom 80% of households—about 92 of the 115 million—is totally subject to the 12.4% payroll tax up to the tax’s maximum of $106,800 a year.
If the wealthiest 1%/741,000 households tomorrow were also required to pay a payroll tax of 12.4% on their total income (dividends, capital gains, interest, rent, etc.), just as the bottom 80%/92 million middle and working class taxpayers pay on their wages, the payroll tax would produce tax revenues of an additional $85 billion every year.
The next 19%, or 22 million, households earn both capital incomes and salary-wages, but for their salary-wages only up to the payroll tax maximum of $106,800 a year and on their capital incomes nothing at all as well. If they were to pay the 12.4% tax on both their capital incomes and on all their salaries earned in excess of the $106,800 payroll tax ceiling, probably an additional $85 billion a year would be raised.
That’s a total of additional tax revenue of $170 billion a year, just by requiring every household, regardless of their income type and level, to pay the same payroll tax. Certainly the wealthiest 1%, having increased their share of total income from 8% to 24% in recent decades, could well afford to do so.
If the federal government then took this yearly flow of $170 billion and committed it new job creation, it could create a total of 4,020,500 jobs paying $40,000 a year. With half of the $170 billion, 2 million jobs could be added to the economy by means of direct federal job creation. With the remainder of the $170 billion, the government could subsidize 50% of the wages for new jobs for an additional 4 million jobs in the private sector, provided that companies paid the other 50% and the jobs were created first and subsidized only 30 days after proof of new hires.
In short, with $170 billion 6 million jobs could be created by simply taxing all households the same 12.4% on all their incomes, regardless of income form or origin.
There’s another financial benefit to this proposal. By the government directly creating 2 million jobs, and providing incentive for business to create another 4 million private sector jobs, it produces an additional tax revenue of $36 billion a year. That is, assuming a 15% federal income tax rate and an average $40,000 a year income per job, the 6 million additional jobs generate further income tax revenue of $36 billion.
That $36 billion could then be used to provide emergency, no interest loans in the amount of $9,000 per year for the 3.4 million homeowners that faced foreclosure in 2010. That’s about half their average annual mortgage cost ($18,000) for the 3.4 million.
For those who think this overly generous, consider last month’s audit of the Federal Reserve Bank. It showed the Federal Reserve provided literally trillions of dollars in zero interest loans to banks and other financial institutions that were facing default over the past three years, even though they were a central cause of the crisis. Why not do the same—i.e. provide zero interest loans of a mere $36 billion to 3.4 million U.S. homeowners the next three years who didn’t cause the crisis but who were its victims? The banks sat on their zero interest loans, accumulating reserves of $1 trillion, refusing to spend (i.e. loan) it. It’s far more likely the 3.4 million homeowners will spend their mere $36 billion and thereby contribute to economic recovery.
In contrast to our single proposal to raise just one tax rate, equal for all households, to create 6 million jobs and save 3.4 million homeowners, Obama has recently announced the opposite: a payroll tax cut of 2%. It is estimated this tax cut will cost about $120 billion a year, adding that amount to the U.S. budget deficit, unlike raising $170 billion without adding to the deficit. Apart from the deficit impact, which proposal (raising the payroll tax or cutting it) will create more jobs?
Obama maintains that business’s share of the $120 billion, $60 billion, will lower business costs, thus add to business income, which in turn will be invested by business in new jobs. But business is already sitting on nearly $2 trillion in cash. Will another $60 result in business spending on jobs when $2 trillion has thus far failed to do so?
Obama further argues the other $60 billion of the payroll tax cut paid previously by employees will result in more consumer spending. That in turn will induce businesses to invest and create jobs. But a good part of that $60 billion will be saved by consumers, or used to pay down their mountain of debt. That leaves a paltry $30 billion at best—not even remotely enough of spending to create jobs.
Remarkably, the current crisis is the only recession since 1945 where the federal and state and local governments did not create jobs to offset job loss in the private sector. The federal government has created no net jobs during this recession, and state and local governments have laid off hundreds of thousands. And all that even though the current recession is far worse than any of the 10 that preceded it since 1945.
The federal government should use the $170 billion to create a 21st century Works Progress Administration (WPA) program, directly hiring workers to rebuild the U.S.’s crumbling infrastructure, thereby stimulating jobs in construction as well as accelerating the development of alternative energy projects and related service sector jobs across multiple industries. The government should also subsidize 50% of wages for 4 million more jobs in the private sector, focusing on subsidizing U.S. manufacturing jobs in particular.
If banks won’t loan and wealthy investors and corporations won’t invest—both sitting on huge piles of cash and refusing to invest and spend it—then it’s time for government to take their money and do so directly itself. If not, the alternative is another two years of economic stagnation or worse—at least for the 92 million households for whom the deep recession is still very much a reality.