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Tuesday, February 8, 2011

Unemployment Tax

There is a good article in the Wall Street Journal today about President Obama's likely budget proposal to increase the base upon which unemployment tax (FUTA) is owed by employers. The article also includes a Q&A on how employment taxes work by Sara Murray - here.

A few observations:
  • One element of tax policy (tax system design) is who pays the tax - directly and indirectly. The FUTA is imposed on employers, but most likely really paid by employees in the form of lower wages and partly by customers in higher prices.
  • Unemployment covers employees. Should there also be a safety net for self-employed individuals who either lose their entire business or see a reduction during an economic downturn? Why not have all workers and service recipients (employers) pay some portion of compensation into a fund that workers could draw upon for emergency living expenses or retraining?
  • There are some compliance and tax gap issues with unemployment taxes. One problem is referred to as SUTA dumping where a business might set up a new business in order to get a lower unemployment tax rate. For more on that, see information on the California EDD page - here.

What do you think? Should the employer payments be increased? Are there better approaches to helping unemployed and underemployed employees and self-employed individuals?

1 comment:

Peter Reilly said...

I really don't see how you can apply unemployment to the self-employed (except the technically self employed like partners in large partnerships). Moral hazard is too great.