Payroll tax exemption could boost economy

This Labor Day weekend, there are about 15 million Americans who are unemployed, and job growth is stagnant as economists predict the possibility of a "double dip" recession or a slowdown that lingers for years and years. In his Saturday radio address, President Obama pledged to place renewed emphasis on the economy and jobs. In times like these, Americans expect more from their presidents than they can deliver and blame them for more than they have caused. Both Presidents Bush found themselves blamed for economic problems they didn't create and couldn't solve, the same dilemma Obama is in now.

The economic stimulus Obama proposed had a positive effect on the economy, most economists agree, but could not overcome the many underlying problems. So jobs are still hard to come by, and the housing market has not recovered. Talk of a new stimulus is being viewed skeptically by voters and by members of Congress. Unease over budget deficits and the federal debt is affecting the debate over the expiration of Bush tax cuts and the over any new economic initiatives.

So what's the answer? Robert Reich, who was President Clinton's secretary of labor, is proposing an appealing new approach. Reich points out that 80 percent of Americans pay more in payroll taxes (which fund Social Security and Medicare and are applied to the first dollar earned) than they do in income taxes (whose deductions and exemptions ignore the first several thousand dollars of income). He proposes a one-year moratorium on payroll taxes for the first $20,000 of income. This would be offset by applying the payroll tax to incomes above $250,000. Under current law, the payroll tax ends at $106,000 in income. Reich says his proposal would be revenue neutral — the loss of revenue from lower-income workers would be replaced by revenue from those earning more than $250,000 in salaries.

His plan would increase consumer spending because workers would see all of their first $20,000 in income in their paychecks, not the $18,470 they now receive after payroll taxes are taken out. Employers would also save $1,530 on the first $20,000 in salaries they pay their workers, and that would make it cheaper to create new jobs and hire workers. Companies with employees earning over $250,000 would take a hit on the employer match for those workers, but nearly all companies would come out ahead.

It sounds like a solid plan to me. It would have no net effect on Social Security and Medicare, and it would almost certainly put an economic boost into the hands of consumes and small businesses. Why limit it to one year?