A new policy idea, offered by Sen. Sherrod Brown (D-OH), would place a “fee” on large employers with low-wage workers. The proposal would increase payroll taxes for certain businesses, which would likely discourage companies from hiring lower-income workers and speed the switch to automation. This particular approach, which amounts to a roundabout attempt to promote higher wages, is problematic for several reasons.
The “Workforce Subsidization Reimbursement Fee” would fall on large employers, defined as those who have paid $100,000 in payroll taxes per day over a 180-day period. The rate of the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. depends on the share of staff earning wages less than 200 percent of the individual federal poverty level, or $24,280 in 2018.
| Percent of Employees Below 200% FPL | Fee as a Percent of Total Payroll |
|---|---|
| Source: http://www.brown.senate.gov/download/plan-to-restore-value-of-work, page 43 | |
| Less than or equal to 25% | 25 basis points |
| Greater than 25% up to 50% | 50 basis points |
| Greater than 50% up to 75% | 75 basis points |
| Greater than 75% | 100 basis points |
| Health and retirement offset | 25 basis points |
This would create a payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. on lower-income workers that increases as employers hire additional lower-income workers. The tax would kick-in when an employer hires enough workers to pass the $100,000 payroll tax level, potentially discouraging hiring or wage increases as a business approaches that limitation. Firms might slow their growth to avoid this threshold.
The tax increase would increase the price of labor, which would potentially discourage employment and speed the rate of automation, as a large employer with even one worker earing a wage below $24,280 in 2018 would incur a 0.25 percent tax on its total payroll. Because firms would be hesitant to employ low-wage workers, it’s quite likely that unemployment would increase for these populations. And this problem would be exacerbated because the tax increases based on the share of lower-income workers that are employed at a firm. Instead of enacting policies that encourage firms to hire more individuals, Sen. Brown’s proposal would have the exact opposite effect.
All taxes create deadweight loss, or, in other words, distort activity in a way that slows economic growth and leads to lower levels of employment, wages, and output than would otherwise occur. Because of the harmful effects of taxes, they should be designed to cause the least distortion possible while raising needed revenue for government functions. A proposal that targets payroll tax increases on companies that employ lower-income workers would distort hiring incentives and reduce economic activity and efficiency.
It’s also important to note that income over one year is a poor proxy for standard of living. Income tends to be low at younger ages, and then rise with age as workers accumulate experience. Rather than directly target benefits to lower-income taxpayers as the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. does, the Workforce Subsidization Reimbursement Fee proposal would add complexity to the tax code and create distortions without directly targeting the intended beneficiaries.
In contrast to this proposal, some changes in tax policy can have a powerful effect on lifting real, after-tax incomes by incentivizing saving and investment. For example, the Tax Cuts and Jobs Act reduced the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 35 percent to 21 percent, a change that we expect will boost capital investment and thus provide better tools that will make workers more productive—meaning that workers will earn more over time. These gains raise living standards and increase wages and employment over time.
Instead of adding provisions to the tax code that would reduce efficiency, distort incentives, and ultimately reduce welfare, lawmakers should focus on ways to improve the current tax code. Simplifying the Earned Income Tax Credit, streamlining household saving through universal savings accounts, and further improving the tax treatment of investment would all be worthy alternatives.
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