I have been conducting an informal survey and discussion on the impact of payroll taxes on small businesses. Since small businesses represent at the least 50% of employment in the country; thus the impact of payroll taxes weighs significantly on the employer.
The employer determines whether to hire someone part time or full time on the basis of the payroll tax.
I have been conducting this informal survey for the past 11 years and I have further devoted more time to this survey in the past 2 years due to the state of the economy. As a small business person; I know of the impact of the payroll tax on my business and this has given me another insight into how the economy really functions. I consider myself a pragmatic economist.
I have discussed with about 1200 business owners in the past 11 years about the impact of payroll taxes on their bottom line and also on their hiring decisions. I have spoken with business people at trade shows, warehouse clubs (Sam’s Club and Costco) and also at other retail outlets like Walmart. Whenever I am in the checkout lane or noticing people buying in bulk and I also talk to restaurant owners and basically people in the service related businesses. I also talk to people in almost all industries.
I ask the basic questions of what part of the taxes really affects their decisions to hire or expand their businesses and it is amazing how the impact of payroll tax affects their decision.
Conclusion:
I recommend a revision in the way the employer part of the matching contribution on the payroll tax. This is the biggest obstacle and the most demanding to the employer. For example the employer matches at 100% the Social Security and Medicare. I believe that in order to spur employment the matching of the employer contribution should be based on the level of the gross payroll of the company.
Gross payroll up to $50K Matching contribution should be 5.0% not 100%
Gross payroll up to $75K Matching contribution should be 7.5% not 100%
Gross payroll up to $100K Matching contribution should be 10.0% not 100%
Gross payroll up to $125K Matching contribution should be 12.5% not 100%
Gross payroll up to $150K Matching contribution should be 15.0% not 100%
Gross payroll up to $175K Matching contribution should be 17.5% not 100%
Gross payroll up to $200K Matching contribution should be 20.0% not 100%
Gross payroll up to $225K Matching contribution should be 22.5% not 100%
Gross payroll up to $250K Matching contribution should be 25.0% not 100%
Gross payroll up to $275K Matching contribution should be 27.5% not 100%
Gross payroll up to $300K Matching contribution should be 30.0% not 100%
Gross payroll up and above $1M would require the matching contribution at the 100%.
This would really have an effect on the level of employment in the country. This would encourage employers to employ more people. This is similar to the Hire Act of 2010 except it goes further and encourages more employment. This would also give more purchasing power to the middle class as the employers might increase their hours and thus helping the economy.
It should also be noted that Robert Reich has been talking about a payroll tax holiday on the first $20K of income. I do not really advocate for this as I feel that this would have a bigger effect on the deficit.
I strongly recommend revising the matching contribution levels on the employer matching the social security and Medicare at the current level.