The employment credit in the Committee bill also has three other effects which are undesirable. First, the credit would encourage the substitution of part-time for full-time workers. The total wage bill limitation presumably is aimed at denying the credit to employers who substitute part-time for existing full-time workers. However, given some growth in money wages--currently on the order of 6 to 7 percent per year--the total wage bill limitation will be largely ineffective against the replacement of current fulltime workers with part-time workers. Many of these parttime workers will be second and third earners in families, while those displaced are more likely to be family breadwinners. The second distorting effect of the credit relates to overtime employment. A firm that decides to reduce overtime and hire additional workers may be excluded from the credit because of the wage bill limitation. This results from the fact that overtime work is paid at higher rates than straight time work. As a result, replacing overtime work with new employees could reduce the total wage bill, thereby bringing the overall wage limitation into play. Thus, the credit is a disincentive to a desirable means of spreading available work; the addition of new jobs after some workers have worked a full week. A third distortion is that it would easily be possible for noncorporate employers in tax brackets exceeding 50 percent to make money from this program simply by hiring new workers and telling them to stay at home. For example, for an employer subject to the 70 percent marginal tax rate bracket, the tax saving from paying the new employee wages up to the Federal Unemployment Tax Act base of $4,200 actually exceeds the gross amount of wages paid. The tax deduction for wages paid reduces the after-tax cost of labor to 30 cents on the dollar. Then the credit provides an additional tax savings of 40 cents -- or 50 cents where handicapped persons are hired - for a net wage cost of minus 10 cents or 20 cents. Thus, by paying $1 of wages qualified for the credit, after-tax income of the employers can increase by 10 or 20 cents even if the new employee is totally unproductive. - It should also be understood that any tax reduction attributable to the incremental credit would be confined to the industries and regions that would otherwise have experienced employment growth, and primarily to small and medium-sized businesses. This means that trade and construction workers would benefit as compared to those in manufacturing, and there would be an acceleration of the movement of jobs to those regions that have been growing more rapidly, especially in the South and West, as compared to those places where employment growth has been slower or employment has been declining. Another characteristic of this credit is that the types of jobs that would receive the most subsidy would be those requiring limited skills and at relatively low pay. This is one result of limiting the provisions to small businesses. Also, because this program will provide a large subsidy for each additional employee, but for only the year in which he is hired, many of these additional jobs may also be temporary. The House bill also included an additional 10 percent credit where the increase in the first $4,200 of wages paid is due to the hiring of handicapped workers. This credit would not be subject to the $40,000 cap. We believe that it would cause a number of administrative problems. It must be recognized that it is difficult to target narrow expenditure programs through the tax system. We oppose the enactment of this special credit. Extension of 1977 Individual and Corporate Tax Reduction The House bill also extends through 1978 three important tax cuts that would otherwise expire at the end of 1977. The Adminstration supports these extensions. The three tax cuts are as follows: (1) The general tax credit equal to the greater of $35 for each taxpayer and dependent or 2 percent of the first $9,000 of taxable income. (2) The earned income credit which is equal to 10 percent of the first $4,000 of earned income with a phase-out as income rises between $4,000 and $8,000. It is available only to people with dependent children. (3) The increase in the corporate surtax exemption from $25,000 to $50,000 and the reduction in the tax rate on the first $25,000 of corporate income from 22 percent to 20 percent. These changes reduce fiscal year 1978 revenues by $7.8 billion of which $6.8 billion is attributable to the general tax credit and $1.0 billion to the corporate reduction. In fiscal year 1979, the reduction is $6.2 billion of which $3.9 billion is attributable to the general credit, $1.0 billion to the earned income credit, and $1.3 billion to the corporate reduction. APPENDIX II A. "NEW JOBS CREDIT," AS PASSED BY THE HOUSE OF REPRESENTATIVES: SEC. 302 OF H.R. 3477, MARCH 9, 1977 To provide for a refund of 1976 individual income taxes and other payments, to reduce individual and business income taxes, and to provide tax simplification and reform. 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 4 (a) SHORT TITLE.-This Act may be cited as the "Tax 5 Reduction and Simplification Act of 1977". TITLE I-REFUND OF 1976 INDIVIDUAL INCOME TAXES; PAYMENTS TO RECIPIENTS OF CERTAIN BENEFITS PART I-REFUND OF 1976 INDIVIDUAL INCOME TAXES Sec. 101. Refund of 1976 individual income taxes. Sec. 102. Refunds disregarded in the administration of Federal programs and federally assisted programs. Sec. 103. Payments to the governments of American Samoa, Guam, and the Virgin Islands. Sec. 104. Payment not to be considered income or a reduction in Federal income taxes under State law. PART II-PAYMENTS TO RECIPIENTS OF CERTAIN BENEFITS Sec. 111. Special payment to recipients of benefits under certain retirement and survivor benefit programs. Sec. 112. Special payment to recipients of aid to families with dependent children under approved State plans. Sec. 113. Provisions applicable to special payments generally. TITLE II-REDUCTION AND SIMPLIFICATION OF Sec. 201. Change in tax rates and tax tables to reflect permanent increase in standard deduction. Sec. 202. Change in definition of taxable income to reflect change in tax rates and tables. Sec. 203. Extension of individual income tax reductions. Sec. 204. Change in filing requirements. Sec. 205. Withholding tax. Sec. 206. Effective dates. TITLE III-REDUCTION IN BUSINESS TAXES Sec. 301. Extension of certain corporate income tax reductions. 1 SEC. 2. AMENDMENT OF 1954 CODE. 2 Except as otherwise expressly provided, whenever in 3 this Act an amendment or repeal is expressed in terms of 4 an amendment to, or repeal of, a section or other provision, 5 the reference shall be considered to be made to a section or 6 other provision of the Internal Revenue Code of 1954. 9 out "December 31, 1977" and inserting in lieu thereof "De 10 cember 31, 1978" and by striking out "January 1, 1978”. 11 and inserting in lieu thereof "January 1, 1979": (relating to surtax exemption); (3) section 821 (a) (1) (relating to mutual insur 12 (1) section 11 (b) (relating to normal tax); 13 (2) section 11 (d) 14 15 16 17 18 19 ance companies); and (4) section 821 (c) (1) (A) relating to alternative tax for certain small companies). SEC. 302. NEW JOBS CREDIT. (a) IN GENERAL.-Subpart A of part IV of subchapter 20 A of chapter 1 (relating to credits allowable) is amended 21 by inserting after section 44A the following new section: 22 "SEC. 44B. CREDIT FOR EMPLOYMENT OF CERTAIN NEW 23 24 EMPLOYEES. "(a) GENERAL RULE.-There shall be allowed as a 25 credit against the tax imposed by this chapter the amount |