In principle, we have here the potential for a major

breakthrough in the methods by which government aids business and aids the economy. The Ways and Means Committee proposal, with or without constructive amendment, will move significantly toward bringing into gainful employment those officially listed as unemployed as well as largely uncounted millions who are dropouts from the labor force or about to enter it for the first time. As such, it deserves sympathetic consideration from us all, and particularly from the Select Committee on Small Business. As a short-term, two-year measure it has special value in accelerating our recovery from recession. It should also encourage consideration of long-run measures to encourage the productive labor on which our economy and our society depend.

for the increase in the FUTA base to $6,000 will be necessary for 1978.)

1.

By calculating the rate of growth of employment as g1 (taken from FUTA wages) but then using x, the lesser of and 8U 81 - w (from FICA), and applying x to 177, we avoid virtually all inducement to increase

part-time or short-term employment disproportionately.

If a firm

does increase part-time or short-term employment disproportionately FUTA wages will grow rapidly but the tax credit would be held down by the lesser increase in FICA wages (81). Conversely, if a firm merely increases its total wage bill by raising wages or hiring more expensive or fuller-time or longer-term workers its tax credit will still be kept proportionate to the lesser increase in FUTA wages (g).

2.

3.

If the rate of the employment tax credit is to be kept as high as 40%, the credit should be subtracted from wages or salaries paid (or simply added to taxable income). Otherwise, the credit for a firm with income tax rate over 60% actually makes the after-tax cost of labor negative. For example, with a maximum tax rate of 70%, the after-tax cost of a dollar of additional wages is 30 cents. The tax credit of 40 cents would then mean that the firm can gain 10 cents by paying a worker to do nothing! For a corporation with a marginal tax rate of 48 percent, the final after-tax cost of a dollar of additional wages is 52 cents 40 cents = 12 cents.

Small firms would probably tend to have a lower than 48 percent rate, whether incorporated or unincorporated, so that they would be better off if the credit rate were kept high but the credit were subtracted from wages and salaries paid in calculating costs to be charged against gross receipts in order to arrive at taxable income.

The gross revenue loss will be reduced significantly by the subtraction above which, in effect, makes only wages net of the credit a cost for

tax purposes.

4. The gross revenue loss may also be reduced by applying the credit to an adjusted value of I which would include FICA wages up to only some lesser figure than $16,500. If this figure were as low as $4,200, the formulation would, with W set equal to zero, be essentially the Ways and Means Committee FUTA-based proposal. This would, however, suffer the disadvantage of encouraging disproportionate increases in part-time or short-term employment. The disadvantage could be mitigated by allowing a lesser rate of credit (but one greater than zero) for the difference between I and the adjusted value of I.

5.

6.

The gross revenue loss may also be reduced by adopting an upper limit to the total tax credit per firm, analogous to the $40,000 limit in the Ways and Means Committee proposal. This would have the disadvantage, however, of eliminating the inducement to increase employment for large growing firms or rapidly growing small firms which would be at their upper limit without increasing employment any more than they would have increased it anyway in the absence of the tax credit. If the credit were to be limited for larger or more rapidly growing firms it would hence be preferable to reduce the rate, as from 40 percent to 20 percent, for wages subject to the credit after the upper limit for the full credit has been reached. If the gross revenue loss must still be reduced this can of course be accomplished by reducing the general rate of credit below 40 percent. The more that this rate is reduced, however, the less is the incentive to hire additional employees. To the extent that firms would be hiring employees with annual wages above $4200, though, the higher base, in comparison with the Ways and Means Committee proposal, would compensate, in its incentive effect, for the lower rate.