Home > Main > Orszag supports the linking payroll taxes to unemployment rate – aka the TC rule

Orszag supports the linking payroll taxes to unemployment rate – aka the TC rule

August 9, 2011

Peter Orszag – the former economic advisor to President Obama – really must like the TC rule.

He keeps bringing up linking the payroll tax to the unemployment rate. He talked about it in congressional testimony in June.

The Traders Crucible was the first to propose linking spending to the level of unemployment in April of 2011.  Beowulf – aka one of the guys who got the Trillion Dollar coin into the mainstream press  – and I started linking the level of spending of the TC rule to the level of payroll taxes just a few days later.

Orzag proposes a system of reducing or increasing the level depending on how much unemployment increases or the absolute level.

I think the TC rule is simpler.

Here is the TC rule again:

Spending Deficit =

1.8(current unemployment %-unemployment target %) + (target inflation-current inflation) + Population Growth = %G

I certainly hope some sort of way to link the payroll taxes to unemployment levels gets talked about all over the place.

I talked about why linking the level of payroll taxes to the unemployment rates hits a sweet spot of effective demand that’s really, really hard to target a while back.

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  1. steveroth
    August 9, 2011 at 2:04 pm

    I’ve suggested a number of times in a number of places that EITC be indexed to unemployment. (I haven’t worked out a formula, though.)

    The EITC structure could potentially be much more stimulative than the flat payroll tax structure because it would target funds father down the income/wealth spectrum.

    Thoughts?

  2. steveroth
    August 9, 2011 at 2:09 pm

    Since congress inexplicably eradicated the Advance EITC, though, payroll tax changes could have more “salience” because people would seem the difference immediately on their weekly paychecks.

    Advance EITC allowed people to opt in to receive the credit on their weekly paychecks. But in any case, inexplicably (no publicity) hardly anyone did (<5% of recipients, maybe <1%). Still, it's ridiculous that they ended this program, undoubtedly avoid an expense shift into the current fiscal year…

  3. beowulf
    August 9, 2011 at 3:52 pm

    Steve Roth, I think one of the reasons that’s so is EITC is too complicated, that is, for the people its intended for. If you can handle the math, you’ll probably earn too much to qualify. As a consequence it has a high error rate with, uniquely for “tax errors”, cases of people claiming too little as well as the expected too much.
    Advanced EITC didn’t make things any simpler, in fact, since it was an advance on next year’s return and not a “installment plan refund” from this year’s return, a poor family living hand to mouth could rationally decide to wait for a large check next year free and clear instead of taking a little bit each week this year that they might be required to pay back.

    Obama’s making work pay tax credit (or whatever it was called, he junked it during one his periodic budget negotiation surrenders) was an excellent idea and should have been expanded to replace EITC. The paperwork was minimal since it tied into the employer payroll tax payments (the IRS even provided modified withholding tables).
    The alleged problem with using payroll tax system to provide wage subsidies is that some lower wage jobs are held by people with wealthy spouses (like the HS teacher I had who drove to work in a Rolls Royce). So what? Since the wealthier spouse is hit by higher income tax rates, it all comes out in the wash. Even if payroll taxes were cut to zero by a tax holiday, the system would still work. The employer (or his payroll company) could add the designated amount to paychecks and then take a 100% income tax credit for the payment.

  4. steveroth
    August 9, 2011 at 4:18 pm

    Thanks, Beowulf. Makes sense.

    • beowulf
      August 9, 2011 at 9:20 pm

      No problem Steve, and you definitely have the right idea. Incomes at the low end of the scale need to be boosted and its true that wage subsidy programs (like EITC) are the most efficient way to do it. What EITC does wrong is that the govt is actually writing a check. If its run through the employer, the additional wages would be paid by the employer who, in turn, would credit the full amount paid against his own tax liability (a “Pigovian virtual wage subsidy”). At that point, might as well raise minimum wage to the post-subsidy level, it wouldn’t cost anything.
      http://blog.libertarian.org.au/2009/05/05/pml-on-tax-reform/

      Ralph Musgrave proposed something similar as an alternative to a MMT job guarantee (which would necessarily require the Feds or each state to create a large govt program to oversee it), provide wage subsidies to employers who hire the unemployed for temp jobs.
      http://ralphanomics.blogspot.com/2011/02/make-work-job-guarantee-wpa-etc-should.html

  5. steveroth
    August 10, 2011 at 9:47 am

    I’m really coming to like the employment-indexed payroll tax idea. Another advantage is that payroll tax adjustments are very much on the political table already, so it’s not just a pie-in-the-sky idea.

    • beowulf
      August 11, 2011 at 1:14 pm

      Steve, I was thinking this morning about your original point– about using the EITC structure since it targets those with low income. While the payroll tax rate should be marked up or down inversely with unemployment rate. The regulate effective demand in, well, the aggregrate. So I think there’s a need for a virtual wage subsidy for those who are unemployed as well as those working at or near minimum wage, which adjusted for inflation has dropped 30% since the 1960 (now that’s a demand leakage).

      Congress could set the requirements for employer tax credit percentage, pass through (fraction of credit that must be added to worker’s check) and phase out ( ex. SSI disability, each additional $1 in wages phases out payment 50 cents). Or they could just give the Secretary platinum coin-style discretion, he could scale credits up (as Ralph Musgrave suggests) to cover 100% of wages on temp jobs for unemployed; or require a 50% tax credit against minimum wage be passed through totally to worker– kicking effective minimum wage from $7.25 to $10.88 an hour; or phase out to zero so every worker gets a flat wage subsidy (After all, a floating payroll tax holiday is a variable percentage, half pass-through, zero phase out wage subsidy).

      I’d be delighted Congress set formulas for a floating payroll tax, virtual wage subsidies and Fed rates (like Randy Wray says, lock it at 0.25% IOR/FFR, 0.50% discount). But if any one official should be given discretion by Congress to meet Congress’s Full Employment Act mandate that both unemployment and inflation rates should be less than 4.0%, the Secretary’s the man. Of course for that to happen, Congress would have to understand (as Volcker learned at the Fed), you can either target quantity or price, but not both. If their price is the < 4% dual mandate, the quantity of the budget deficit has to float.

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