As if our long, slow climb out of the recession hasn’t been long and slow enough, the economy is stalling. This could prove to be a temporary blip tied to high gas prices and supply disruptions in Japan, as the optimists tell us, or it could be an early indication that we’re doomed to endure a double-dip recession. All we know for sure is that we won’t see the kind of job growth we badly need unless we do something drastic. My recommendation is a deep and permanent tax cut for the young. And to demonstrate my good faith, I have in mind a tax cut that would only apply to people younger than myself.
As millions of Americans leave high school and college this year, whether as newly minted graduates or as dropouts, they are running into a 17.6 percent youth unemployment rate. That number masks significant differences. College graduates are faring better than high school dropouts, yet all are taking much longer to get on the first rungs of the economic ladder than when times are flush. And as Lisa Kahn of the Yale School of Management found in a 2009 study, this will have lasting consequences. Kahn tracked white men who graduated during the deep recession of the early 1980s, and found that they earned 7 to 8 percent less than workers with the same skills who graduated in a stronger economic climate. This earnings gap tended to shrink over time, yet Kahn found that recession-era grads earned 2 percent less than their counterparts 18 years after college. Over time, this earnings gap represented tens of thousands of dollars in lost wages and lost opportunities to build a better life.
If the children of the financial crisis have a similar experience — and we have every reason to believe that they will — we can expect them to delay marriage and child-rearing, and to spend their young adult years living with parents or roommates. Millions of households won’t be formed, leaving the housing market in the doldrums. Once today’s young workers form families of their own, they will tend to be smaller, which will make the burden of paying for Social Security and Medicare much heavier. The end result could very well be a permanent, self-perpetuating slump.
To jump-start the economy, we could try another round of temporary fiscal stimulus. But workers and firms understand that temporary policies are temporary, and they behave accordingly. Last year, the economists Claudia Sahm, Matthew Shapiro and Joel Slemrod found that only 13 percent of households reported higher levels of spending due to the 2009 stimulus law’s targeted tax cuts. It turns out that households that anticipated that their incomes would decline over the next year were far more likely to save the money than to spend it. This wasn’t a bad thing insofar as it helped cash-strapped families pay down debt. But it didn’t do much to boost spending, output and employment, the stated goals of the stimulus law. More to the point, it didn’t target the young workers who represent our economic future. Permanent, sustainable policies, in contrast, allow people to make long-term plans and commitments.
Which leads us to a potential solution. Matthew Weinzierl, an economist at Harvard Business School, recently made an intriguing theoretical case that age-dependent taxation could raise the efficiency of the tax system. The mechanics of such a reform are easy to imagine. The governments of Australia and Singapore already give a tax break to older workers, recognizing that they need a stronger incentive to remain in the work force. Giving a substantial tax break to the young would hardly represent a huge conceptual leap. Rather than give young workers a lump-sum credit, we’d make the rate schedule for under-30 workers significantly lower. For example, the basic rate would be 5 percent instead of 10 percent. This would recognize that the marginal tax rate makes a bigger difference in decision-making when you’re young and carefree than it does when you’re middle-aged and have to make mortgage payments.
It should be clear that a tax break for the young wouldn’t magically solve the youth unemployment problem. There is, however, good reason to believe that it would yield significant economic dividends for everyone by giving young workers more disposable income that they can use to make investments in their future and, even more importantly, to encourage family formation. Bigger families will make it easier to finance the retirement of the baby boomers, while also fueling consumer demand for the long term. Tax cuts for the young would be such a boon that I think middle-aged workers should be willing to accept higher taxes to pay for them.
Unfortunately, it’s far from obvious that most middle-aged voters will feel the same way. A tax break for the young would be an extremely tough sell in Congress. All the same, it is a cause worth fighting for.
As millions of Americans leave high school and college this year, whether as newly minted graduates or as dropouts, they are running into a 17.6 percent youth unemployment rate. That number masks significant differences. College graduates are faring better than high school dropouts, yet all are taking much longer to get on the first rungs of the economic ladder than when times are flush. And as Lisa Kahn of the Yale School of Management found in a 2009 study, this will have lasting consequences. Kahn tracked white men who graduated during the deep recession of the early 1980s, and found that they earned 7 to 8 percent less than workers with the same skills who graduated in a stronger economic climate. This earnings gap tended to shrink over time, yet Kahn found that recession-era grads earned 2 percent less than their counterparts 18 years after college. Over time, this earnings gap represented tens of thousands of dollars in lost wages and lost opportunities to build a better life.
If the children of the financial crisis have a similar experience — and we have every reason to believe that they will — we can expect them to delay marriage and child-rearing, and to spend their young adult years living with parents or roommates. Millions of households won’t be formed, leaving the housing market in the doldrums. Once today’s young workers form families of their own, they will tend to be smaller, which will make the burden of paying for Social Security and Medicare much heavier. The end result could very well be a permanent, self-perpetuating slump.
To jump-start the economy, we could try another round of temporary fiscal stimulus. But workers and firms understand that temporary policies are temporary, and they behave accordingly. Last year, the economists Claudia Sahm, Matthew Shapiro and Joel Slemrod found that only 13 percent of households reported higher levels of spending due to the 2009 stimulus law’s targeted tax cuts. It turns out that households that anticipated that their incomes would decline over the next year were far more likely to save the money than to spend it. This wasn’t a bad thing insofar as it helped cash-strapped families pay down debt. But it didn’t do much to boost spending, output and employment, the stated goals of the stimulus law. More to the point, it didn’t target the young workers who represent our economic future. Permanent, sustainable policies, in contrast, allow people to make long-term plans and commitments.
Which leads us to a potential solution. Matthew Weinzierl, an economist at Harvard Business School, recently made an intriguing theoretical case that age-dependent taxation could raise the efficiency of the tax system. The mechanics of such a reform are easy to imagine. The governments of Australia and Singapore already give a tax break to older workers, recognizing that they need a stronger incentive to remain in the work force. Giving a substantial tax break to the young would hardly represent a huge conceptual leap. Rather than give young workers a lump-sum credit, we’d make the rate schedule for under-30 workers significantly lower. For example, the basic rate would be 5 percent instead of 10 percent. This would recognize that the marginal tax rate makes a bigger difference in decision-making when you’re young and carefree than it does when you’re middle-aged and have to make mortgage payments.
It should be clear that a tax break for the young wouldn’t magically solve the youth unemployment problem. There is, however, good reason to believe that it would yield significant economic dividends for everyone by giving young workers more disposable income that they can use to make investments in their future and, even more importantly, to encourage family formation. Bigger families will make it easier to finance the retirement of the baby boomers, while also fueling consumer demand for the long term. Tax cuts for the young would be such a boon that I think middle-aged workers should be willing to accept higher taxes to pay for them.
Unfortunately, it’s far from obvious that most middle-aged voters will feel the same way. A tax break for the young would be an extremely tough sell in Congress. All the same, it is a cause worth fighting for.
