lemma, namely, that posed by the concurrent problems of inflation and unemployment. The extent and breadth of employment credits will far exceed that of the investment tax credit. Further, there is empirical evidence that firms can adjust their use of labor services to changes in the employment credit rate much faster than they can adjust capital to changes in investment tax credit. Thus employment credits will have a more immediate impact on the economy than will an equivalent cost investment tax credit program. I am now going to make some comments on the structure of the employment tax credit. While the specifics of various programs differ, there seem to me to be three parameters to consider in specifying the form and nature of employment credits. They are first, the size or cost of the credit; second, the focus of the credit, that is whether it should be assigned per employee, or assigned to some percentage of the wage rate; and third, the appropriate base for determining eligibility. It develops that a number of questions regarding equity, windfall profits to business, and the credit's impact on aggregate spending and the deficit will center on the definition and administration of these three parameters. For example, the Carter plan to provide a 4 percent tax credit on employer's contribution to social security is one polar case. It is a wage credit with a zero employment base. The program proposed by Chairman Ullman, which offers a tax break of up to 20 percent on new workers, represents the opposite pole. It is a wage credit with now a 103 percent base. Our suggestion, presented in our Joint Economic. Committee paper,,is that a wage credit be established in the context. of a variable base plan. In this case, the base for determining eligibility is defined in terms of full-time equivalent employees. We recognize the problem with that definition. (It is also the definition that Senator Javits used in the 1971 proposal.) This base can be varied according to changing business conditions. Thus, the name, "variable base. employment credit." A program similar to our structure is that offered by Senator Bentsen. Our theoretical and empirical work on this topic is developed in the context of a standard, aggregate model of the U.S. economy. The basic form of that model and several numerical calculations that result. from that structure are summarized in the Joint Economic Committee study. Since development of that report, we have completed further analytical and empirical research, and now are more able to speak to several additional critical points. I have enclosed a table in my testimony, and it is not essential that you have the numbers in front of you, I will summarize it. The enclosed table presents some numerical calculations of the percentage impact of a 1-percent wage credit on the U.S. economy. These calculations are constructed for the third quarter of 1976. The estimates include the direct and indirect impact of the program, as mentioned earlier, that is, the demand and supply effects. Also, calculations are presented for several base percentage levels, from zero through 100 percent. We have taken care to use conservative parameter estimates whenever the choice is critical to the results. While we know the model to be more complete than many of those used by others, we still advise caution about placing too much emphasis on the magnitude of particu lar changes. The directional impacts of these variables, however, do seem quite reasonable to us and deserve comment. The calculations demonstrate and highlight my previous comments garding the joint impact of the employment credit on aggregate employment and aggregate spending. In the case before us, we have fixed Government expenditure but tax receipts, unemployment compensation, and the deficit are permitted to adjust in response to credit. The responses of employment, output, price level, wage level, and the Government deficit are presented for a series of different base level programs. For example, a zero base percentage means that all previously employed and newly hired members of the work force are eligible for the credit; a base percentage of 100 percent means that only newly hired workers are eligible, that is, a 100 percent base is a "marginal employment tax credit." Several of the results follow: 1. Employment and output increase in response to the credit for all base percentage levels. The greatest employment effect occurs at the lower base percentage levels. The greatest employment effect occurs at the lower base programs. Here, the aggregate supply-demand effects both support expansion. 2. The effect of the credit on the price level depends on the program base. Low base programs have the greatest impact on aggregate demand and, therefore, are the most stimulative. Note the price level does not increase for every case considered in the table. 3. The patterns of wage changes are generally similar to those of prices. 4. The deficit increases as the program base declines, and the increase is greatest for low base programs. The response of the deficit essentially represents the net loss in tax receipts that develop from granting a tax credit on all workers. In concluding my formal remarks, I would like to make four points. First, employment credit programs seem to offer a distinct alternative to traditional monetary and fiscal policies. In particular, the credit not only affects aggregate supply by directly stimulating employment and output, it also affects aggregate spending levels of households, businesses and Government. It is this feature of the program that offers the potential for stimulating employment, without first requiring an increase in the price level. Second, an employment credit program will have a wider scope of coverage than existing investment stimulants, and, therefore, will fall more evenly on all sectors of the economy. Seemingly, it will support the more labor intensive firms and industries which are not now greatly benefited by the investment tax credit. Third, we feel that a variable base wage credit, unencumbered with other administrative qualifications, offers the most promising structure for a comprehensive employment tax credit program. Finally, to facilitate administration as well as to offer the widest and most equitable coverage, the program might most easily be tied to the existing payroll tax system. Any tax credit that results might then be considered as a credit against payroll tax liability, and most specifically I think we are talking about social security taxes-FICA tax liability. I have included two appendixes. Senator HASKELL. They will be included as part of the record. Professor FETHKE. Appendix A simply discusses briefly the variable base and appendix B raises in my mind some of the most critical questions one can address to the aggregate impact of this program. Thank you very much. Senator HASKELL. Thank you. [The prepared statement and attachments of Professor Fethke follows:] Testimony Before the Senate Small Business Committee by G. C. Fethke Associate Professor of Business Administration The University of Iowa (February 22, 1977) by G. C. Fethke Associate Professor of Business Administration The University of Iowa I. Introduction Mr. Chairman, members of the subcommittee, and staff, thank you for inviting me and providing the opportunity to discuss with you the topic of employment credits. Much of my research on this subject is summarized in a Joint Economic Committee paper entitled, "Employment Tax Credits as a Fiscal Policy Tool," which was published last July.1 My comments today draw from that report as well as from our subsequent research. I use the generic terms "employment credits" to refer to a variety of job credit and wage subsidy programs that are now being proposed and debated by members of the Congress, the Carter Administration and others. These programs are intended to be short-term in nature and more or less universal in coverage, They contrast, therefore, with the various selective credits that seek to subsidize the employment of particular members of the workforce, particular regions of the economy, or possibly, particular groups of industries. While a number of selective employment credit programs have been attempted in Europe and the U.S., there has not been, to my knowledge, any attempts to institute an economy-wide employment credit Gary C. Fethke and Samuel H. Williamson, "Employment Tax Credits as a Fiscal Policy Tool," a study prepared for the use of the Subcommittee on Economic Growth of the Joint Economic Committee, Congress of the United States, U.S. Government Printing Office, July 21, 1976. |