Costco Connection - April 2009

from experts in the field:

Congressman Sam Johnson (R-Texas) serves on the tax-writing Ways and Means Committee ( waysandmeans.house.gov).

MARCH DEBATE UPDATE:
Should animals have the
same rights as people?

THE LABOR DEPARTMENT report for January stated that the number of people receiving regular unemployment benefits stands at 11. 6 million Americans, making the unemployment rate 7. 6 percent.

YES 7%

During debate on the economic stimulus legislation, I wanted
Congress to take aggressive action to help those striving to keep it
together during these lean economic times, especially those who had
lost their jobs. That’s why I suggested Congress temporarily remove the tax on unemployment
benefits for 2008 and 2009. (In fact, President Obama touted this idea initially as well.)

NO 93%

Percentage reflects votes
received by March 13, 2009.

In the end, the economic stimulus bill eliminated taxes on unemployment benefits earned in 2009 for the first $2,400 (roughly two months’ worth of benefits at an average benefit of

$300 per week) a person receives. Since normal unemployment benefits last three months, and individuals in states with high unemployment are eligible for six months of benefits, excluding from taxation the first two months of benefits is a nice start. At this time of economic turbulence, however, the whole duration of unemployment benefits should not be subject to income tax. Here’s why.

< First, unemployed people need their benefits to cover the period of transition from one job to another and simply don’t have the cash flow to pay taxes on top of living expenses.

FEBRUARY DEBATE RESULTS:
Should dating co-workers
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YES: 34% NO: 66%
Percentage reflects votes
received by February 28, 2009.
Results may reflect Debate being
picked up by blogs.

< Second, I have to question the ability of even the Internal Revenue Service (IRS) to collect this tax liability from people who simply don’t have it; and if the IRS is successful, would it be by forcing people on the brink into bankruptcy? It’s exceptionally inefficient to provide a financial benefit and then ask for a certain portion back, and do all of this through the IRS. It defies common sense!

Some will advocate that all unemployment benefits for any period of time should be excluded from income tax. This was the case prior to 1986, but, for low-wage workers in particular, it was discovered that an untaxed unemployment benefit was too close a substitute for a taxed paycheck and that people were less inclined to get back to work. I try to learn from mistakes of the past and so I do not support making unemployment checks fully nontaxable forever. C

from experts in the field:

Patricia M. Anderson, Ph.D., is a professor of economics at Dartmouth College and a faculty research fellow with the National Bureau of Economic Research.

NOBODY LIKES PAYING taxes. Not the recipients of unemployment
insurance (UI) benefits. Not people on fixed incomes who face rising
prices. Not small-business owners who must still pay taxes even
though business has taken a turn for the worse. However, once we
accept that there is an income tax, it makes sense to tax all sources of
income rather than play favorites. When one source is not taxed, it becomes more valuable
than sources that are taxed. In this case, a dollar in UI benefits is worth more than a dollar
earned by working. Why should that be the case?

Removing the income tax on UI benefits would not help the families that need it most, as the benefits would accrue mainly to higher-income families. Why is this? First, the lowest 40

percent of households (in terms of income), who, according to my research, receive just more than 35 percent of UI benefits, pay very little in income taxes. As a result, this group of UI recipients would be helped very little by changing the taxable status of benefits. At the same time, the top 20 percent of households (which receive almost 20 percent of UI benefits) pay more than 60 percent of all income taxes and would receive the most aid from a tax change.

It is also important when thinking about any increase in the value of UI benefits to recognize that it has been shown time and again that higher benefits result in longer spells of unemployment. While that may be an acceptable trade-off during the current downturn, it is unlikely to be optimal in better economic times. Thus, any benefit changes should be temporary; perhaps the program could be keyed to the unemployment rate.

Those who have recently suffered a job loss are in the midst of tough times, making it natural to want to help them out by making their UI benefits tax-free. This can be thought of as an increase in benefits for these unfortunate unemployed workers. If that is the goal, though, then why not temporarily add a federal stipend to the state unemployment insurance benefit? A fixed federal stipend added to current benefits could help all families equally.

This would more directly help the unemployed and get the money they need into their hands right away. C

Opinions expressed are those of the individuals or organizations represented and are presented to foster discussion. Costco and The Costco Connection take no position on any Debate topic.