GOP presidential candidate Jon Huntsman has a jobs plan: subsidize investment. That’s good for the wealthy, but they’re doing well now. Let’s subsidize labor. (More)

To Create Jobs, Subsidize Labor

Rather than a series, this week Morning Feature will bounce around several topics. Yesterday we discussed the argument that President Obama should channel FDR. Today we examine a different approach to helping more American workers earn a living wage. Tomorrow we’ll consider the role of Fred Whispering in progressive Democratic activism.

Huntsman’s plan: Subsidize investment

Republican presidential candidate Jon Huntsman unveiled his jobs plan Wednesday. Based on the solutions he offers, he thinks the unemployment rate has remained stubbornly high because wealthy people pay too much in taxes, especially on their investment incomes, while poor and middle class people pay too little. Of course, he’s packaged it so that’s not obvious.

Huntsman’s plan would establish just three income tax brackets with rates at 8%, 14%, and 23%. Those are modest rate reductions for low- and middle-income Americans, and huge reduction for the wealthy who now pay 35% on income over $380,000 per year. He would also create a single corporate tax bracket of 25%, down from the current progressive structure with the top bracket at 35%. And just in case that isn’t enough help for the wealthy, Huntsman would completely eliminate taxes on capital gains and dividends. In other words, subsidize investors.

Huntsman says his plan is revenue neutral, so who would pay to subsidize investors? He says he’ll pay for it by eliminating deductions and loopholes. While some of those are corporate goodies that many progressives would like to see gone, Huntsman would also take away deductions and credits that help low- and middle-income families, such as exclusions on primary income Social Security benefits, veterans pensions and disability benefits, military combat pay, workers compensation payments, public assistance benefits, and employer-paid health insurance. Huntsman’s plan would also eliminate the child tax credit, and the Earned Income Tax Credit.

When all of the changes are factored together, a Tax Policy Center study estimated that a middle-income family would pay $1890 more in taxes, while eliminating taxes on capital gains would leave the wealthiest 1%  paying an average $75,000 less and the wealthiest 0.1% an average $486,000 less.

In short, our archetypal working Fred would subsidize our archetypal wealthy Charles‘ investments. According to conservative dogma, that will induce Charles to invest more, and some of that investment will create jobs for unemployed Freds. Or maybe for unemployed Wĕis, if Charles wants cheaper labor. Because American workers are overpaid.

My plan: Subsidize labor

Enacted in 1975, the Earned Income Tax Credit is widely acknowledged as “one of the singular successes of American social policy in recent decades.” It worked so well that 23 states enacted supplemental EITC programs, and the United Kingdom modeled their 2000 Working Families Tax Credit on the EITC. President Obama expanded the EITC in the 2009 American Reinvestment and Recovery Act, and the 2010 EITC looked like this:

EITCGRAPH

Simply, the EITC is a government subsidy for low-income labor. Rather than raising the minimum wage – which limits job growth for low-margin businesses who can’t afford higher wages – the EITC adds up to $5666 to a working family’s income, in the form of a fully refundable tax credit. If you’re married with one child and your income tax would be $4000, your $3050 EITC means you should have paid only $950 in taxes. If your payroll withholding totaled more than that, you get a refund. If another married-with-one-child family’s income taxes would be only $2000, they get all of their payroll withholding back, plus another $1050 for the balance of their EITC.

Do what works … better

While the EITC has worked well, it has problems. It’s complex, which requires low-income people to get help with their tax returns. Many don’t know they’re eligible and don’t apply for it. A 1999 study found that almost one-third of EITC applications contained errors, mostly from confusion. And while the 2009 reforms helped somewhat, the EITC still discourages marriage as a spouse’s income may reduce or eliminate eligibility.

I suggest simplifying the EITC by both broadening and standardizing it. Call it the American Worker Tax Credit, make every American worker eligible, and set a full-time standard credit of $8000. For a full-time minimum-wage employee, currently earning $14,500 per year, that would mean a net income of $22,500. That’s not rich – it’s about the 40th income percentile – but it’s a living income. Part-time workers would get a prorated AWTC based on their hours worked. And it should be payable quarterly, rather than having to wait for the annual tax return.

Yes, that means Charles would also get his $8000 credit. Except he wouldn’t notice it, because his taxes would go up to pay for it. With about 170 million Americans in the work force, the AWTC would cost about $1.36 trillion per year. The top 1% of Americans earn an average $1.6 million per year. Set the top marginal rate at 50% – what it was in 1980 – and that would pull in $800,000 per top 1% taxpayer. Multiply that by the 1.7 million Americans in the top 1%, and you get … $1.36 trillion.

The American Worker Tax Credit would make U.S. workers more cost-competitive with overseas labor. It would also boost demand, as working families would have money to spend on goods and services they need. Businesses would have to hire more people to produce those goods and services.

The American Worker Tax Credit would make Charles subsidize Fred’s labor. Conservatives will of course howl about “redistribution of income.” But Jon Huntsman thinks Fred should subsidize Charles’ investments. Which makes more sense for Fred?

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Happy Friday!