THE BLOG
09/08/2011 04:48 pm ET | Updated Nov 08, 2011

Uphill From Here: Why US Jobs Policy Will Improve

Let's hope today goes down in history as the low point of our national debate on jobs, and that it's all uphill from here. With job creation flat-lining, tens of millions of Americans sidelined, President Obama's proposals getting panned before they are announced, and the jobs speech scheduling flap dominating the news, many feel the unedifying spectacle of our thwarted discourse on employment policy can hardly get any worse.

But there is reason to hope it will get better from here. Frustrated observers like Ezra Klein can be forgiven for despairing of finding solutions in this polarized climate, yet there is an evolution underway in both parties towards a truly transformative jobs policy.

Part of this evolution is represented by the White House pushing to extend 2011 payroll tax cuts for employees, and expand them if possible into tax breaks to lower employers' hiring costs. Payroll taxes kill jobs, and the CBO says that per dollar of budget expenditure, cutting them is the most efficient job creator -- much more efficient than infrastructure spending. Another part of this evolution is the fact that in order to cut the deficit, the "super committee" will have to find a politically acceptable way to raise revenues. Put the two parts together and you can discern the future direction of bipartisan employment policy and fundamental tax reform: a revenue-neutral tax shift that moves the tax burden off employing people and onto consuming things.

That's the gist of a proposal long advanced by social entrepreneur Bill Drayton: cut taxes on jobs, and swap them with non-labor taxes on resource and energy waste, pollution and harmful consumption. This sounds somewhat implausible today, but it's inevitable -- not a question of "if" but "when" -- because we lack the funds or the deficit headroom to sufficiently stimulate jobs and growth any other way, and because tax shifting would correct distortions in the tax code that have become intolerable for the economy.

For the last 75 years, we hiked payroll taxes until they became the largest, most regressive tax most Americans pay and raised 40% of federal revenue by cannibalizing jobs growth. They artificially raised labor costs by 17%, while effectively subsidizing businesses' use of materials, energy and land, and therefore joblessness, foreign energy dependence, energy and resource waste, and pollution. Non-labor resource use, like capital, is over-leveraged. Our biggest untapped resource for growth is the many tens of millions of sidelined Americans whose contributions to the economy are being lost.

This is a kind of vacuum history abhors. Sooner or later, whatever the political landscape, we will simply have to correct these untenable distortions by cutting the $800-900 billion we levy each year in payroll taxes and replacing the revenue with taxes and/or tax expenditure roll-backs on non-labor items, as many other OECD countries have already done. When we do, we will shift the relative prices of labor vs. non-labor inputs to business 30% or more, sending a powerful, undistorted price signal to hire more workers, creating at a stroke an effective trillion-dollar jobs stimulus without spending a dime, and unleashing decades of pent-up job growth.

Political opposition to payroll tax cuts will prove transient. Some Republicans fighting them today used to support them, and may again when the political climate changes. NPR pointed out this morning that Lamar Alexander is now opposing PRT cut extension, yet nine months ago he was all for them He's not the only one. This summer House Majority Leader Eric Cantor signaled he'd be open to raising some new revenue as part of a deficit deal, provided that it was ploughed in a revenue-neutral way into tax cuts for job-creating businesses -- exactly what payroll tax shifting would do. Bruce Bartlett recently articulated the conservative "Case Against A Payroll Tax Cut," yet in 2009 he made the case for them, arguing we should "abolish that portion of the payroll tax that pays for Medicare and use VAT revenue instead." Some Democrats also worry extending payroll tax cuts would undermine Social Security funding, but that concern is mostly moot if payroll tax cuts are coupled with equivalent new revenues from non-labor sources, which can also be dedicated to the Social Security Trust Fund.

The fortunes of both parties hinge on the seemingly conflicting imperatives of stoking jobs and growth while bringing down the deficit. Spending money we don't have, or simply cutting corporate taxes and gutting spending to the point of abandoning governments basic responsibilities, can't thread that needle. But payroll tax shifting can, and eventually will.