Make America Safe Again

Recently, Laffer and Hartley proposed a negative payroll tax as a more desirable means of moving money into individual pockets than the current multi-pronged response to the health and economic impact of coronavirus. These responses include the Economic Impact Payments, Pandemic Emergency Unemployment Compensation and Pandemic Unemployment Assistance, the Paycheck Protection Program, among others. Laffer and Hartley’s recommendation is to, instead, take some of the approximately 9.40% employees and employers both pay in payroll taxes,¹ and turn it into a negative tax received by employees and employers.

They recommend their policy on the following grounds, “so long as there [is] relatively little means testing and phaseouts were long and gently sloped”:

• it would be faster than the Employee Retention Tax Credit (or Hawley’s tax rebate);
• it avoids inefficient and expensive government and banking procedures;
• it would boost new spending rather than go to saving or paying bills from previous spending;
• it would reduce employers’ wage costs;
• it would put the brakes on rising unemployment;
• it would speed recovery by keeping employer-employee pairs together.

While their policy has merits, I believe that a negative income tax as described by Milton Friedman plus a wage match is a far better answer. This is because, in broad strokes, the right policy details can do all of the above while simultaneously providing greater extra income to (1) those who need to spend it now, not save it for later;² (2) those with the bad luck of working for a firm that does not see it as profitable to keep workers on payroll for a ~5.9% reduction in labor costs, and (3) those who feel utterly trapped by their economic circumstances into risking their life.

Admittedly, Laffer and Hartley present a pitch more than a policy prescription, yet we can nonetheless build a generic policy based on their pitch and see that it needs improvement. Among its strengths, it would provide extra income to many essential and frontline workers earning between $10 and $30 per hour (or $20,000 to $60,000 per year).³ Among its weaknesses, a “long and gently sloped” phase-out period (1) provides extra income to those less likely to spend that income. Further, a phase-in period (2) provides nothing to those with the bad luck of working for firms that will not retain employees during a pandemic to produce product that no one will consume. Last, it is too quick to (3) incent abstract low-wage workers to work rather than imagining that your aging father is a grocer, your sister a shipper and handler, your child a custodian or nurse.

For those interested in the details, the generic policy I’ve constructed assumes that, instead of removing 7.65% from the typical employee’s paycheck to fund Social Security and Medicare, we add 21 times that (or 160.65%) to each worker’s first $15,000 after policy implementation. To fill out other details, I note that Laffer and Hartley claim that “the real problem” with the Earned Income Tax Credit (EITC), in contrast to their negative payroll tax, “is that the subsidy is removed as a person’s income rises, thus creating a disincentive to work at certain income levels.” Combined with the requirement that “phaseouts were long and gently sloped,” I assume a generic policy with a standard phase-in and a plateau and phase-out period that are roughly twice as long as those of the EITC. This means that each worker returns to their normal hourly wage on earnings between $15,000 and $35,000 and they pay the benefits back on earnings from $35,000 to $95,000.

Figure 1: Formulations of a Negative Payroll Tax

A Better Policy

One alternative, of course, is a negative income tax plus a wage match. Compared to Laffer-Hartley’s proposal, this alternative could easily further concentrate the benefits among essential and frontline workers earning less than, or near the full-year, full-time median wage of $48,565,⁴, while offering nothing to those earning over $75,000. Although this has a shorter phaseout period that goes into effect at a lesser income, this does the job of increasing and strongly rewarding labor force participation on the extensive margins (more people) rather than the intensive margins (more hours). This also encourages work-sharing with a heavy marginal tax rate between $50,000 and $75,000. The negative income tax starting at roughly $400 per week also gives everyone upper-middle class capacity to avoid risking their lives at work, thus enabling more of us to survive the crisis and fewer of us to grieve the loss of a loved one. These things, too, surely count for economists.

Figure 2: Formulations of Alternatives

Figure 3: Benefits for Marginal Dollar Earned

Figure 4: Effective Hourly Wage of Alternatives for Full-Time, Year-Round Workers