The Problem

We Suffer Mass Unemployment

America can significantly gear up its economy in only one way: by offering work to the under- and unemployed portion of its adult population that is healthy and not institutionalized. This non-working segment of the population is surprisingly large –- much larger than the 14+ million Americans now officially labeled as "unemployed" by the Bureau of Labor Statistics (Employment Situation Summary, July 8, 2011). The Bureau's report notes that more than 8 million Americans are working "part time for economic reasons" — because they were unable to find a full-time job. Beyond these "official" unemployed and  under-employed, there are more than 60 million adult Americans who are not working. Many of them have been pushed out or defined out of the labor pool — seniors and young retirees, minorities, the disabled, many of the young, many women, and those who are too weak or too ill-equipped to compete in today’s job-scarce environment.

While allowing these many millions of people to work would produce a dramatic increase in the flow of goods and services, it would have the additional benefit of saving both families and governments much of the staggering dependency payments they now make to support those not working. It would also sharply reduce the host of destructive social dysfunction costs -- ranging from crime to de-motivated students to avoidable illnesses -- that America suffers by denying jobs to so many. Lowering these costs would also make it possible for America to strengthen her fraying safety nets and make good on social insurance promises -- especially since fewer people would still need help.

The key is to get the nation to look at its economic situation, especially employment and taxation, in a fresh light.

Payroll Taxes and Unemployment

It’s time to reconsider our dangerous and growing dependence on payroll taxes. By any measure, our system of social insurance is one of the biggest success stories of all time. Perhaps the greatest anti-poverty program ever, it has provided economic security, retirement income and health care benefits to over 100 million Americans. Unfortunately, our whole system of social insurance—Social Security, Medicare, and unemployment insurance, and disability and survivor benefits—is financed, for the most part, by payroll taxes that discourage employers from hiring and some workers from working while also reudcing incomes for those at the lower ends of the pay scale. As more "baby boomers retire," in five, ten or twenty years, when we desperately need more jobs and workers to help pay for Social Security and Medicare, Congress could be forced into prescribing exactly the wrong medicine: job-killing payroll taxes.

Payroll taxes do more damage than any other tax -- to the economy, social wellbeing, the environment, and income distribution. Payroll taxes have grown from 1 percent to almost 40 percent of federal revenues, a gigantic accidental national increase in the price of hiring people.

Reducing U.S. Reliance on Payroll Taxes: The Key to Faster Growth

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.

By thus both enlarging the tax base and also reducing both dependency and social dysfunction costs, cutting payroll taxes in turn makes further significant tax cuts and/or new public investments possible. Because its base is so broad, moreover, cutting payroll taxes or sending out payroll tax rebate checks gives a solid boost to the economy.

What Every American Needs to Know about Payroll Taxes:

America’s Reliance on Payroll Taxes is Growing:

• Payroll taxes accounted for 1% of federal revenues in 1934, 32% in 2000, and 36% in 2008.

• Payroll taxes, for most workers, consume close to 17 percent of salaries, 15.3 percent alone for Social Security and Medicare.

Payroll Taxes Hit Low and Moderate-Income Workers the Hardest:

• Three out of four households pay more in payroll taxes than personal income taxes.

• The Social Security payroll tax is capped; for 2010, earnings above $106,800 are not taxed.

Payroll Taxes Reduce Employment:

• Payroll taxes increase the cost of labor. High payroll tax rates: 1) discourage employers from hiring more workers; 2) contribute to the outsourcing of jobs; and 3) prompt some businesses to relocate manufacturing capacity overseas.

• By reducing the rewards to work, high payroll tax rates also discourage marginal workers from entering the labor force.

Payroll Tax Relief Could Create Tens of Millions of New Jobs:

• By taxing our consumption of energy and natural resources, rather than payrolls, we can create jobs. Payroll tax relief lowers the cost of labor, making it less expensive for businesses to hire and retain workers.

• Taxing our consumption of energy and natural resources also encourages employers to make their methods of production less energy-intensive and more labor-intensive. And that means more jobs.

• Lowering the cost of labor also makes American workers more competitive with overseas workers—and that reduces the potential “outsourcing” of American jobs.

• By changing the way we tax ourselves, we can create tens of million new jobs. Daniel Hamermesh, a leading labor market economist who teaches at the University of Texas at Austin, estimates that reducing payroll taxes by just ten percentage points would create 3% more jobs in the short run, and as much as 10% in the long run. Hamermesh says that even more jobs could be created if taxes on natural resources were substituted for the payroll tax.

Declining Payroll Taxes: The European Example
Historically, payroll tax rates—with a few notable exceptions—have been much higher in Europe than the United States. Burdened by high payroll tax rates that stifle job creation, unemployment in Europe has been much higher than the U.S for several decades. In recent years--prior to the current recession--Europe had been slowly closing the employment gap. One critical reason: lower payroll tax rates.  More >