Unemployment Insurance and Personal Income Tax

The current policy that funds unemployment insurance is a regressive tax on employers, in which the first $7,000 of an individual?s income is taxed at a 6.2% rate. This is broken down into six percent taxed directly for unemployment, and an additional .02% surcharge on employers. Minnesota has an additional state tax of .05% (bringing the tax rate in Minnesota to 6.25%). This is regressive in the sense that firms pay on their employees first $7,000 regardless of whether they make $15,000 or $65,000 per year. It is not based on ability to pay as we have discussed in class.

?However, an evaluation of equity is complicated. It is not as simple as a localized tax in which everyone theoretically benefits (for example, construction of a major highway). There is a wealth of economic data suggesting that individuals in higher skilled (and higher paying) jobs are less likely to apply for unemployment, and when they do, they require significantly less assistance than those in low-skill, low pay positions. One proposition addressing this was built into the Unemployment Insurance Modernization Act. It proposed to create a progressive tax structure in which a lower bracket of earners would be taxed on the first $7,000, and a higher bracket of earners would be taxed on their first $15,000. The prevailing question then is this: is it equitable to seek a higher input from firms who have high earners when those earners will not likely utilize the benefits the tax is paying for?

The following video explains how the federal unemployment tax (FUTA) is calculated. The same process can be applied to any additional taxing a given state implements.

?http://www.youtube.com/watch?v=Ng07hIMogJk

?It is important to note that employers who pay their taxes adequately and on time are eligible for a federal tax credit equaling 5.4% of their burden. It seems to me that this credit could be adjusted to trigger a higher percentage payout for firms paying taxes on their high earners? first $15,000, the overall reform could be feasible. The burden of this then lies primarily on the government, keeping the fiscal responsibilities of states and employers relatively low, while achieving the broader goal of increased funding support for the nation?s unemployed.

Source: http://pa5113.blogspot.com/2012/03/unemployment-insurance-and-personal.html

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