A Payroll Tax Holiday Would Not Stimulate Hiring

January 11, 2002

Workforce received this letter to the editor from David Coelho, the director of administration and finance for a non-profit organization in Boston, Massachusetts..

Regarding your article on a "payroll tax holiday" to help end the recession: Much of what you wrote is interesting, from a fairness and equity standpoint. However, I find the "tax holiday" as an employment incentive a little baffling.

I cannot see where a payroll tax holiday would generate significant incentives to employers to add employees to their payroll. According to statistics from the U.S. Department of Labor (DOL), less than .2 of 1 percent (33 thousand of over 17 million) of the businesses in America employ more than 100 employees. The average annual salary in the United States is currently just under $26,000.

Using these figures, in order to generate enough savings from a one month Social Security tax moratorium, only companies with more than 204 employees would be able to hire a single individual for a year, and then only at an average salary in the company, with Social Security and Medicare taxes. This would not take into account any other benefits (health, retirement, and other basic benefits). Plus, the one-month savings in Social Security taxes needs to be made up to keep an already critical Social Security system from sliding further toward insolvency. The total savings for all workers/wage earners/employers exceeds $35 billion (probably a conservative figure) and the treasury would have to fill that gap.

The formula would generate additional jobs at these rates.

500 employees = 2.46 full-time employees;

1000 employees = 4.9 full-time employees;

5000 employees = 24 full-time employees;

10000 employees = 49 full-time employees, and so on.

If, on average, those 33,000 businesses employed 205 workers, a one-month holiday would generate enough money to employ less than an additional 33,400 employees for a year. While 33,000 new jobs would mean something, especially to those new employees, it is a one shot deal; it is dwarfed by current U.S. non-farm employment, estimated at over 130 million; and, the fact is that in December 2001 alone, payrolls decreased by 124,000 employees, and there are 2.6 million more unemployed as of December 2001 than in December 2000. The more likely scenario would be that companies would take any savings and at best keep a few people from becoming unemployed, and more likely plug holes in their insurance, energy, and utility budgets.

Would a payroll holiday help ease the recession? It would ease some people's pain and belt tightening, and it would be the most equitable tax cut offered today, and it may even delay layoffs. However, the only real force that grows the economy is investment, and a payroll tax holiday for a month will not foster a long-term fix to minimize this recession or other future downturns.

A better choice would be to revamp the Social Security tax code, lower the rate, and apply it to all income levels, not just those under the current level of approximately $85,000. By reducing the rate and amount of tax on employees, and including all income levels, individuals would have an increase in their take-home pay over a sustained time. At that point, other incentives to save via traditional bank or investment options could be employed. The code could be changed to so that employers' total Social-Security-tax liability is maintained at current levels, a fact that would almost be automatic as a lower rate is applied to all employees.

Would lower income workers save these funds versus spend them? Hard to say. Increases in energy, food, and health insurance costs hit lower income workers harder. The immediate impact of the recent tax cuts (up to $300 for an individual, and $600 for a two wage earning household -- most did not receive the maximums) seemed to be that it reduced overall debt load, or was spent on a one-time expense. Some saved it, bought mutual funds, or bought a CD. Others donated it to a charity, the various 9/11 funds, or local social service organizations.

The key here is that most people do not understand the value of investment, and the time value of money. HR departments and 401(k) investment houses need to make it easy for employees to understand the mechanism, and the value of compounding. In addition, Congress and the financial industry need to make it easier to invest and to gain access to your money when you need it.

I enjoy reading your articles, as my experience in HR has mostly been a "seat of the pants" thing, and HR issues have become a significant part of my job. I used your site to research ideas for our employee manual and alternative work schedules. It has been very helpful in creating a very comprehensive HR system for a small organization. However, on this particular part of this tax holiday issue, I think the actual outcomes wouldn't pass muster, plus the cost to the treasury would be in excess of $35 billion. That is a big number, and the $35 billion could be better applied to the unemployed for health care costs, to business loans and grants, to student loans and grants, and other areas where the investment of funds generates far greater returns.