in the depths of the 2008-’09 financial crash, Rahm Emanuel, then White House chief of staff, famously said, “You never want a serious crisis to go to waste.” What he meant was that policymakers should try to harness the energy of an emergency to spur positive change. Seen through that lens, the recent government shutdown and default “crisis” offers Congress a chance to redeem itself.
Suppose there were a single, bipartisan policy proposal that could spur hiring, lift wages, speed economic growth, raise productivity, and help put the nearly $2 trillion in cash that American corporations now hold (much of it abroad) to work here at home. Imagine such legislation could fit with either the existing tax code or with a reformed one. And suppose you could explain it on a bumper sticker: JOBS = TAX BREAKS.
In the modest spirit of typical congressional nomenclature, I call this idea “The American Jobs and Wage Increase Act of 2014.” Such an act would give a generous, refundable tax credit to any private company or organization that can show that it has grown its payroll — measured by the Social Security taxes it pays — from one year to the next.
To claim the credit, companies would either have to hire more Americans or raise the pay of their American employees. Businesses could not qualify by hiring foreign workers (who don’t pay the Social Security tax) or by boosting the compensation of executives who earn more than the next year’s projected FICA tax cap of $115,500. Thus, this credit would lean against both inequality and offshoring. Companies that can show they have increased their Social Security tax payments should be able to claim a credit worth, say, 25 percent of that increase — or bring home a like amount of their overseas cash at very low or even zero tax rates (versus the 35 percent rate the IRS charges for doing that today).
A company’s Social Security payroll offers an ideal yardstick for granting a pro-growth tax break. Because it would piggy-back on already required tax reporting, it would be easy for companies to administer and near-impossible to “game” — short of fraud.
We should size this credit generously — enough to offset up to half of the $85 billion a year in sequester cuts. To make sure it doesn’t overheat the economy, it would apply only during years when the unemployment rate averages 5 percent or more. To make sure it would benefit early-stage companies, many of which owe no taxes, the credit should be refundable. That would be a big help to young, but not-yet-profitable firms that actually create most new American jobs. Since these entrepreneurs also drive most of America’s productivity gains, we could score another bonus for the whole economy. And it would be market forces — not government — that determine who wins the credit.
There would be topline budgetary costs up front, but the net costs of the jobs credit would be significantly offset by positive changes in economic behavior. As businesses hire more workers or offer more generous pay, federal tax revenues would rise and social costs like food stamps and unemployment insurance would fall even before companies claimed the credit. Growth would surge.
A study by the the Economic Policy Institute suggests that added revenues from more jobs, higher wages, and increased GDP growth — plus savings on social outlays — would reduce the ultimate fiscal costs to the government by roughly 80 percent. It is tough to imagine a more cost-effective way to speed up our still-sluggish recovery.
Beyond the immediate economic gains, such legislation might also boost national morale as Congress — finally — addresses Americans’ well-documented priorities: jobs, wage gains, and economic growth. And growth itself offers the best, most American solution to our country’s long-term deficit problems. So let’s not let our recent, self-inflicted crisis go to waste. Let’s turn the energy of this crisis into something positive for our country by giving America a raise.Robert L. Reynolds is president and CEO of Putnam Investments.