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Cut Taxes -- but Do the Job Right

A better way to create jobs: Revise the Social Security payroll levee.

March 28, 2004|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@

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.

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