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Article Artículo

Have a Flexible Savings Account? Don't Call Employer-Side Payroll Taxes Complicated

Last month New York Governor Andrew Cuomo signed into effect a law that created an optional employer-side payroll tax as a partial substitute for the state income tax. Since then the word in many news outlets is that the take-up is likely to be low since the new tax is complicated.

This complexity line is especially being pushed by conservatives, as in this Newsday article, since the point of the tax is to develop a workaround for the limit on deductions for state and local income taxes (SALT) in the new tax bill the Republicans pushed through Congress last year. This bill limited the SALT deduction to $10,000. This limit was quite explicitly put in place to hit more liberal high tax states like New York and California. Their plan was that if these states wanted to provide higher quality services to their residents and a stronger social safety net, they would pay a big price for it.

The employer-side payroll tax is a way to preserve deductibility. The expectation is that an employer-side payroll tax will come out of wages. To take a simple case, suppose a worker gets paid $200,000 a year. If her employer goes the payroll tax route then the employer will be a paying a 5 percent tax, or $10,000, on the worker's $200,000 salary. We would typically expect this to result in the worker seeing a pay cut of $10,000 so that she only earns $190,000.

While workers don't like pay cuts, in this case, it should not be an issue, since the payroll tax saves them $10,000 on her state income taxes. This means she has just as much money with $190,000 annual pay as she did before when she got paid $200,000 but owed the state $10,000 in state income taxes.

The big difference is that she now faces federal income taxes on just $190,000 of income, not her former $200,000 income. Since this worker is in the 32 percent federal tax bracket, this shift saved her $3,200 off her income taxes (32 percent of $10,000). And contrary to what is implied in the Newsday piece, she gets this savings whether or not she itemizes on her tax return.

CEPR / April 06, 2018

Article Artículo

Economic Growth

United States

Workers

Quit Rates Jump to 17 Year High in March

The percentage of unemployment due to people who voluntarily quit their jobs jumped to 13.1 percent in March, the highest level since May of 2001. This statistic is a good measure of workers' confidence in the labor market, since it means that they are prepared to leave a job even before they have new one lined up. Until this month, the quit rate had been unusually low (mostly under 11.0 percent) given the levels of unemployment we were seeing. The March level is more consistent with an unemployment rate near 4.0 percent.

Dean Baker / April 06, 2018

Article Artículo

Affordable Care Act

Inequality

United States

Workers

Does High CEO Pay Matter to Shareholders?

Last month, we did an analysis that examined the impact of a provision of the Affordable Care Act limiting the amount of CEO pay that could be deducted from profits to $500,000.

In the years after it took effect, this provision raised the cost of CEO pay to employers (i.e., shareholders) by more than 50 percent. Prior to 2013, shareholders of health insurance companies effectively paid just 65 cents on every dollar of CEO compensation, since their taxes would fall by 35 cents for every dollar they paid out. After 2013, they would be paying 100 cents of every dollar.

If CEO pay bears a close relationship to their value to the company, this change in the tax code should have led to some reduction in their pay. Using a wide variety of specifications, controlling for growth in profits, revenue, stock price, and other relevant factors, we found no evidence that the pay of health insurance CEOs fell at all in response to the limit on deductibility.

Dean Baker and Jessica Schieder / April 03, 2018

Article Artículo

Roger Lowenstein, F**k Your Stock Portfolio

I realize it would be too much to ask that people who write on economics for major news outlets have any clue about how the economy works. I say that seriously; I have been commenting on economic reporting for more than two decades. Being a writer on economics is not like being a custodian or bus driver where you have to meet certain standards. The right family or friends can get you the job and there is virtually no risk of losing it as a result of inadequate performance.

But Roger Lowenstein performs a valuable service for us in the Washington Post this morning when he unambiguously equates the value of the stock market with the country’s economic well-being. It seems that Mr. Lowenstein is unhappy that Donald Trump’s recent tariff proposals sent the market plummeting. The piece is titled, “when the president tanks your stock portfolio.” It holds up Trump’s tariff plans as a uniquely irresponsible act because of its impact on stock prices.

Okay, let’s step back for a moment and ask what the stock market is supposed to be telling us. The stock market is not a measure of economic well-being even in principle. It is ostensibly a measure of the value of future corporate profits, nothing more.

Suppose the successful teacher strike in West Virginia spills over into strikes in other states, as now appears likely. Suppose this increased labor militancy spills over to the private sector and organized workers are able to gain back some of the money lost to capital in the last dozen years. That would not be good news for Mr. Lowenstein’s stock portfolio, but it would certainly be good news for the vast majority of the people in the country.

But this is the result of private actors, Lowenstein is upset about a president’s action’s tanking the stock market. Well, let’s give another one that would likely have an even larger negative impact on Mr. Lowenstein’s stock portfolio.

Suppose the next president announces that she will raise the corporate income tax rate back to 35 percent from its current 21 percent level. Any bets on what this does to stock prices?

CEPR / April 01, 2018