It appears that President Obama is willing to accept a compromise in the Senate to extend the tax cut to all but the top two percent of income earners. Some compromises are better than others.
Senator Mark Warner suggests, "other short-term incentives that promote additional hiring, such as a temporary reduction in the payroll taxes paid by employers who hire new workers I am for this kind of tax credit IF it is designed correctly.
Last March we got a "job-creation bill" that, as far as I can tell, has had hardly any impact on employment. This does not surprise -- it was poorly designed. The bill attempted to get jobs only for those who had been unemployed for more than 60 days instead of trying to increase employment altogether.
We need a credit that rewards employers who increase their employment regardless where the new workers come from. We need a credit that is easy to administer. And what is most needed is a credit that helps reduce the cost of low wageworkers.
A Payroll Tax Holiday is a bad idea.
Many people have mentioned a payroll tax "holiday" as one proposal. This would mean that employers and employees would not have to pay their FICA tax. This is a bad idea for two reasons.
First, while it would be great to remove this regressive tax from all employees, how would it be reinstated after a year? Since this is the worker's contribution to Social Security and Medicare, such a "holiday" would create a fear among many of them, as well as current retirees, that this is the first step to abolishing these programs. Also, without these contributions, Social Security and Medicare will be "broke" much sooner.
Second, while suspending the contributions of employers would reduce their labor costs, it would have little impact on hiring, because the payroll tax cost of new employees is a small percent of the total wage bill.
A one-year FUTA (Federal Unemployment Tax Act ) Holiday with a marginal refund would be better.
At the federal level employers pay 6.2% of the first $7,000 of income paid to each worker. Individual states may require additional payments and it also varies by the layoff history of the employer.
I propose that all employers be exempt of all federal or state unemployment taxes for one year regardless of their layoff history. In addition, for every dollar that an employer's FUTA base increases, they would receive a dollar tax credit.
An employer with 10 workers (earning over $7,000) would have a FUTA base of $70,000 and would have a "tax cut" of $4,340 or more. If the business hires 10 more workers, it would receive a $4,340 tax credit as well.
This way, all employers would get some help, but those who hire more workers would get a reward.
The federal government would reimburse states their costs of this holiday from the increase tax revenue from high-income earners.