A better way to create jobs: Revise the Social Security payroll levee.
By Michael Hout
Michael Hout is a professor of sociology at UC Berkeley. He is coauthor
of "Inequality by Design" and many academic articles on employment,
social mobility and social change. E-mail: mikehout@ berkele
March 28, 2004
BERKELEY — Since George W. Bush took office in January 2001, 2.3
million jobs have been lost, according to the Labor Department. The
last president to run a jobs deficit was Herbert Hoover, 70 years ago
at the depth of the Great Depression.
Bush and Hoover are the extreme cases in Republican presidents'
lackluster record on job creation. Twenty years ago, my father and his
union buddies took it for granted that Republicans would not look out
for their interests. People these days seem less likely to connect
Republicans with unemployment, but the historical record speaks
otherwise. During Republican administrations since Hoover, unemployment
increased in more years (19) than it decreased (12). By contrast,
joblessness declined in the vast majority of Democratic administration
years — 31 of 40. The party difference has sharpened in the last 15
years. Unemployment rose in six of the seven years the White House was
occupied by Bushes but fell every year Bill Clinton was in office.
The only Republican to lower unemployment during his administration was
Ronald Reagan, and that success came in his second term, after the
unemployment rate in his first term reached its highest level since the
Depression. Every Democratic president left the White House having
presided over employment gains.
How to account for the difference?
Republicans' typical response to unemployment — and President Bush's
only response — is tax cuts for the affluent. This remedy has proved
ineffective because the connection between people whose taxes are
lowered and those who create jobs is too weak. Most experts agree that
the bulk of the economy's new jobs comes not from established firms but
from new companies. Few entrepreneurs who launch companies start out
rich. They hope their new enterprises will make them rich someday, but
they are seldom rich during the years they create the most jobs. So
cutting the personal income taxes of the affluent fails to create many
jobs because the people we count on to do hiring aren't affluent enough
to get a significant tax break.
If the president and Congress
really want to stimulate employment through tax cuts, they should cut
payroll taxes and forget about income and estate taxes. A payroll tax
cut involves no filings, no returns, no refunds. It comes straight off
the top of wages and salaries. Because both employers and workers pay
payroll taxes, lowering them would provide an immediate stimulus to job
creation.
It works this way: Employee and employer each pay
6.2% on the first $87,900 of wage and salary income to Social Security.
Both pay a flat 1.4% of wages and salaries to Medicare (no cap).
Cutting either one of these taxes would immediately increase the size
of workers' paychecks and thus stimulate demand. Employers' costs would
also be lowered, and they could use their tax savings to hire new
workers to satisfy the rising demand.
But aren't Social
Security and Medicare in trouble? Cutting their revenue streams on the
eve of a wave of baby boomer retirements might seem a recipe for
disaster. Yet, the Social Security funding crisis would significantly
ease if the Bush tax cuts, slated for expiration in 2008, were not made
permanent. If all the money collected through payroll taxes for the
last 20 years were credited to the Social Security Trust Funds and used
only for Social Security and Medicare payments, the Social Security
system would be solvent at least though 2047.
The talk of a
funding crisis arises because the Bush tax cuts, if made permanent,
would deprive the government of revenues it needs to pay off IOUs to
the Social Security Trust Funds. For decades, Congress has dipped into
the fund to pay for sundry programs. If the tax cuts were made
permanent, the trust fund would in effect subsidize the reductions in
personal income taxes for those people who already pay the smallest
share of payroll taxes.
Removing the $87,900 cap on Social
Security taxes would make the system fairer. It would also offset most
of the effect of a payroll tax cut. Despite the fact that only 6% of
employed Americans reach the cap, the portion of their incomes exempted
from Social Security taxes ranged from 14% to 16% of all wage and
salary income in 2003. Removing the cap would generate enough new
revenue to cut Social Security taxes to 5.3% without decreasing payroll
tax revenue.
The jobs deficit is Bush's biggest economic
failure. He has already begun to plead for more time while proposing to
make his tax cuts permanent. Instead, cutting the Social Security tax
rate, and changing the rules so it applies to all wages and salaries,
would make the system fairer and solvent. And it is a tax cut that
would be more likely to stimulate employment.