Can the Federal Reserve Effectively Target Main Street? Evidence from the 1970s Recession

Modern central bankers confront a challenge of providing economic stimulus even when the policy rate is constrained by a lower bound. This challenge has led to substantial innovation by policymakers and a proliferation of new policy tools. In this paper, I offer evidence on the efficacy of a new tool known as funding for lending, which provides banks with subsidized funding to make additional loans. I focus on a historical episode from the United States in which the Federal Reserve provided banks with steeply subsidized loans to promote the expansion of credit within their local communities. I show that the cheap funding succeeded in generating more lending by countering banks' excessive liquidity preference. The additional credit benefited the real economy. Local areas enjoyed higher rates of small business formation and more rapid employment growth. Finally, I show that the cost of the subsidy provided by the government was more than offset by the additional payroll taxes paid out of higher wages and salaries. These results suggest that funding for lending programs deserve consideration for the modern central banker's toolkit and demonstrate that certain unconventional tools can offer monetary policymakers the means to pursue more targeted objectives.

Payroll taxation increases inequality at the top

In recent decades, inequality of household income has increased globally. A common trend is increased income inequality at the top of the distribution. The sources of this trend are a matter of debate. Increased demand for analytical and managerial skills is said to have strongly increased labor incomes at the top. Other scholars have indicated that structural conditions, such as financialization or favorable taxation, have benefited top-earning households. Here, we contribute to the latter line of reasoning. We show that payroll taxation reinforces income inequality at the top. Such taxation has large fiscal volume and redistributive power. However, our knowledge about the distributional consequences of payroll taxation as a tax scheme is remarkably thin. We claim that payroll taxes are central to understanding income inequality. Many countries, such as Germany and the US, restrict payroll taxes to a maximum amount, resulting in significant payroll tax-exempted incomes for high-earning households. Strongly growing top-labor incomes thus lead to increased payroll tax-exempted incomes for households at the upper parts of the distribution and, consequently, to higher income dispersion. We use Germany (1992–2017), a highly redistributive country, as a case study. Our empirical results suggest that: a) households increasingly profit from payroll-exempted labor incomes across the upper quarter; b) this benefit has increased over time; and c) increased amounts of payroll tax-exempted labor income explain up to 60% of income dispersion at the top of the distribution. We discuss the generalizability of our case study for other countries.

Six Decades of U.S. Tax Reform: Why has the Average Couple’s Tax Burden Increased?

We collect basic Federal tax laws over a 64-year period in order to simulate the historical effective tax rates of median income wage-earning couples. We find that effective income tax rates have decreased over the sample period; however, when payroll taxes are included in our calculations, total tax burdens have increased significantly. Interestingly, this increase in middle class wage taxation has occurred over an historical period in which total Federal tax revenue relative to GDP has remained somewhat constant. This implies that the middle class has borne an increasing relative tax burden in recent years. We hope that our analyses inform both the taxpaying public and policy makers of the historical status of middle class wage earners.

Why Orthopedic Surgery for Elderly Indicates that the Maryland Total Cost of Care Model should be Universally Adopted

Arthritis is the disease that kills the fewest but cripples the most. With the aging of the population in the United States and the antiquated DRG reimbursement system for hospital surgical intervention, it is inevitable that the Medicare assistant will bankrupt itself prior to the proposed bankruptcy date of 2026 if changes are not made. It may change would be to insist that the system in Maryland for reimbursement to hospitals for essential joint replacement surgery of the elderly be adapted nationwide. Medicaid expenditures are driven by a variety of factors, including the demand for care, the complexity of medical services provided, medical inflation, and life expectancy. The Medicare program has two separate trust funds – the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. Under the Hospital Insurance Trust, payroll taxes from workers and their employers go towards paying for the Part A benefits for today’s Medicare beneficiaries. In 2019, Medicare provided benefits to over 60 million elderly patients at an estimated cost of $796 billion [1]. While excluding the significant decrease in payroll taxes during the COVID-19 pandemic, the latest 2020 projections calculate Medicare Hospital Trust insolvency by 2026 [2]. The 2020 report declared that funds would be sufficient to pay for only 90 percent of Part A expenses at the time of this writing. Since inception, the Hospital Insurance Trust has never been insolvent, because there are no provisions in the Social Security Act that govern what would happen if insolvency were to occur. Ten of the last twelve years have witnessed expenditure outflows outpacing the Hospital Insurance Trust inflows, resulting in total Medicare spending obligations outpacing the increasing demands on the federal budget, as the number of elderly beneficiaries and the per capita health care costs continue to grow [2]. One of the principal goals of the following study is to determine how elderly patients, who often suffer from acute stages of arthritis and other orthopedic diseases, due in part to wear and tear, can continue to demand surgical intervention, in particular joint replacement surgery. Arthritis has been described as the disease that kills the fewest but cripples the most. With that in mind, the hospital systems ability to absorb the ever increasing number of elderly patients who demand joint replacement surgeries will continue to outstrip supply. The principal author of this study completed his PhD dissertation at the University of Manchester in 1977 by measuring the cost-benefit analysis of the treatment of chronic rheumatoid arthritis in Great Britain. Therefore, the author of this study aims to show the only reasonable method of payment for the imminent immeasurable demand for treatment for the elderly for age related diseases such as joint replacement surgery [3]. A recent Journal of Rheumatology article projects Medicare will finance approximately 2.67 million joint replacement surgeries by 2035, plus an additional 2.35 million joint replacement surgeries by the year 2040 [4]. The author believes that the current nationwide Diagnostic Related Groups (DRGs) system that helps determine how much Medicare pays the hospital for each “product” needs to be phased out as soon as possible. Our research shows that prior to Medicare implementing the DRGs payment system, Maryland proved that their total cost model of state-wide rewards and penalties compensated “efficient and effective” hospitals, providing care as defined by metrics set up by the Health Services Cost Review Commission (HSCRC). The Maryland legislature granted this independent government agency the broad powers to insulate the HSCRC from conflicts of interests, regulatory capture, and political meddling in the long term. In exchange, the HSCRC had the freedom to design a system that must deliver on three areas: cost reduction of hospital services, health improvement for all Maryland residents, and quality of life care improvements. Since inception of the HSCRC, all stakeholders are legally required to comply with robust auditing and data-submission requirements that allow the agency to collect data on the costs, patient volume, and financial condition of all inpatient, hospital-based outpatient, and emergency services in Maryland. This level of transparency allows the agency to set prices for hospital services, and hospitals must obey because it is Maryland law. Because of this methodology, HSCRC-approved average Maryland hospital markups ranged from 18 percent in 1980 to only 22 percent in 2008. During that same period, the average hospital markup nationally skyrocketed from 20 percent in 1980 to more than 187 percent in 2008 [5]. This strong evidence is the primary reason why the HSCRC has continued to receive a federal waiver from the Centers for Medicare and Medicaid Services, which requires both Medicare and Medicaid to pay the HSCRC-approved rates statewide. No discounts are given because of volume, nor any shifting of costs to other payers. There is a mandate: same price for the same service at the same hospital, no exceptions. Adjustments for uncompensated medical care are automatically bundled into the HSCRC-approved rates, as thus, this financial burden is shared by all hospitals in Maryland. This article explores the important milestones taken by the state of Maryland and how the lessons learned are responsible for the impressive results of their program today. This author believes that by applying the Maryland Total Cost of Care Model (Maryland TCOC Model) nationwide will yield financial savings of at least $227 billion by 2035, plus another $280 billion by 2040, exclusively from joint replacement surgeries reimbursed at HSCRC-approved rates and not any other method.

Payroll taxes increase reserves in Ukraine

The authors analyzed the reformation of the payroll taxation mechanism in Ukraine, identified wage differences of the employees at the large, medium-sized and small business entities, figured out the reserves to increase tax revenues and cover the deficit of the Pension Fund of Ukraine by decreasing shadow wages and improving payroll taxation in Ukraine. Significant attention is paid to the salaries of the top managers of large business entities as a possible field of applying progressive taxation of personal income. Based on the analysis of the EU countries experience, the authors suggest imposing the second progressive personal income tax rate of 32% for the monthly income that exceeds 15 minimum wages. As well, the abolishment of the maximum unified social contribution base is recommended. In the paper, the authors prove the importance of reducing the level of the shadow economy in Ukraine by forming a public trust to the government policy and using accumulated tax funds appropriately. It has been proved that by reducing the shadowing of the Ukrainian economy to the EU level, the deficit of the Pension Fund of Ukraine can be covered only partially. This fact determines the necessity for Ukraine to ensure economic growth and increase wages.

Using Payroll Tax Variation to Unpack the Black Box of Firm-Level Production

This paper uses quasi-experimental variation in payroll tax rates in Finland to investigate how firms use their input factors. We find that higher payroll tax rates lead to large employment responses and have no effects on employee-level earnings. As payroll taxes increase, firms substitute away from low-skilled, routine and manual workers. Higher firm-level payroll tax rates also slightly decrease the total output of firms. Our results imply that firm-level production and input factor choices are clearly affected by payroll taxes.

How Do Firms Respond to Reduced Labor Costs? Evidence from the 2007 Swedish Payroll Tax Reform

One way for policymakers to reduce labor costs and stimulate the recruitment of marginalized groups of labor in a highly unionized economy is to lower payroll taxes. However, the efficiency of this policy instrument has been questioned, and previous evaluations have mostly found small employment effects for such reforms. We investigate the effects of a payroll tax cut in Sweden that decreased firms’ labor costs in relation to the number of young employees that they had employed when the reform was implemented in 2007. We find that most firms received small labor cost savings as a result of the reform, but those that received larger cost savings increased their number of employees significantly more than firms that received no, or minor, labor cost savings. Our findings also suggest that the payroll tax cut increased the total wages paid to incumbent workers, but the wage effect was too small to offset the positive extensive-margin employment effect of the reform. In total, we find that the Swedish payroll tax reform created 18,100 jobs over the period 2006–2008; most of these jobs were within the targeted group of young employees.

Social effect of Covid-19: Estimates and alternatives for Latin America and the Caribbean

This document offers estimates of the possible changes in the social structure of the countries of Latin America derived from the consequent economic contraction from the Covid-19 pandemic and explores the possible costs and benefits of different types of interventions to cushion its impact. The analysis forecasts that the number of people living in poverty (extreme and moderate) would increase by up to 44 thousand million people in the region. It also finds that the policy with the highest benefit-cost ratio is the postponement of payroll taxes and social security contributions. Other alternatives such as granting support to unemployed persons, temporarily doubling the benefits of existing social programs, and the transfer of income to self-employed workers also generate a favorable benefit-cost ratio, with differences among countries.