Congress Should Give All Working Americans a $600 Raise

(Bloomberg Opinion) -- Congress is working to correct some of the warped incentives and potential unfairness created by its initial response to the economic crisis caused by the coronavirus. Because of an across-the-board boost of $600 per week in unemployment benefits, for example, some laid-off workers could now earn nearly $1,000 a week.

It’s not that they don’t deserve the compensation. It’s that, at nearly $50,000 a year, people on unemployment could be making far more than many essential workers do. Such generous benefits will make harder for businesses to keep their employees, leading to more layoffs and more difficulty restarting the economy once the virus has been contained. In addition, many workers still showing up at their jobs may feel slighted or resentful.

The simplest fix would be to cap unemployment insurance benefits at whatever an employee was making before being laid off. There are two drawbacks. First, outdated systems in many state unemployment offices make it impossible to determine precisely what an employee was earning immediately before losing their job. Second, having already promised greater benefits, it would be a politically unwise — even cruel — for Congress to take them back now while the nation is still wrestling with a pandemic.

So there are some new ideas circulating to address the problem. One is Senator Josh Hawley’s plan to “Rehire America.” Hawley envisions a system of generous payroll and investment tax credits designed to give employers incentives to do more to retain workers. That’s helpful.

But the plan is not easy to administer and it is not clear that front-line workers will actually receive the raises necessary to make employment more attractive. The plan also tacks on some protectionist measures against China. While sanctions against China and efforts to secure the U.S.’s supply chain may be important going forward, they shouldn’t be used to weigh down urgent efforts to help workers.

A much simpler approach, advocated by the economist Arthur Laffer among others, is to cut the payroll tax for employees to zero and perhaps even provide for a negative payroll tax that would supplement workers’ wages.

This might have been a good idea a month ago; in fact, Congress should have suspended both the employer and employee side of the payroll tax. Now, however, it probably would not be enough to overcome the problems created by the across-the-board increase in unemployment payments. Lower-income workers are the most disincentivized and potentially demoralized by this boost, and they would receive proportionately less of a benefit from a payroll tax cut.

On the other end of the spectrum, some have suggested that the type of tax credits Hawley envisions should be provided only to employers who boost the wages of low-income workers. That has the advantage of directly tackling the unemployment insurance problem, but it adds complexity and increases the possibility of even more unintended consequences. For example, some employers may be reluctant to take the credit because, while they may want to increase wages now, may not be able to afford higher wages after the crisis subsides and the government withdraws its support.

The most straightforward solution may well be for the government to provide an across-the-board $600 per week to most working Americans. Call it “hazard pay.” To ease the administrative burden on states, the benefit could be provided to all workers — employed and not — within the unemployment insurance system.

If costs are a concern, then Congress could add a provision taxing back the benefit for workers making more than, say, $99,000 a year, similar to the economic impact payments provided for in the last relief bill. For these workers, the benefit would effectively be a loan to be repaid during 2021.

However it’s done, such a solution would be expensive. But at least it would be clean and effective — and it could help prevent a spiraling series of unintended consequences that come from efforts to target aid too precisely in the midst of an unfolding crisis.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation.

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