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Geniuses Creating Jobs Get the New York Treatment

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
October 13, 2009
Bloomberg

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Getting Americans back to work is so important that both major political parties agree on the goal. They also agree that the way to do that is to create the right incentives.

Michigan's Democratic Governor Jennifer Granholm has argued that it's time to "target tax incentives" to boost employment. Republican House Whip Eric Cantor said he may support a tax credit that rewards hiring. Nancy-Ann DeParle, President Barack Obama's health czar, said the U.S. must "align incentives" to promote job creation.

Small firms, even those of four employees or fewer, are a focus, since small businesses create an outsized share of jobs. A recently published incentives bible, "Nudge," by Cass Sunstein and Richard Thaler, outlines the theory: our nation's "choice architects," politicians and policy makers, might construct clever incentives that lure individuals to do what's best for all. Sunstein is working on regulatory affairs for the White House, where clever engineering by nudges is all the rage.

But maybe there already is too much nudging going on. Maybe there are too many choice architects. Maybe that's what is making the recovery so unsatisfying.

That might be your conclusion if you looked at the world from the point of view of the New York-based Freelancers Union. The union -- representing some 120,000 contract workers ranging from temps to graphic artists to dog walkers -- includes among its members the very sort of talent that politicians contend will revive the economy.

Poets, Dreamers

Freelancers include poets and dreamers, but they are also the geniuses serving tables while they wait for venture capital infusions. These dynamos find themselves trapped in a maze of incentives and disincentives created by the well-meaning powers that nudge.

Start with New York City's 4 percent unincorporated business tax. The aim of the tax is to make big players who don't happen to incorporate pay their share. But many smaller contractors, even those with less than $100,000 in income, found themselves subject to the UBT, "like dolphins in the tuna net," as Freelancers Union founder Sara Horowitz puts it.

Coming on top of the city, state and federal income tax, the UBT represented a significant deterrent. To comply with the tax, filed April 15, June 15, Sept. 15 and Jan. 15, many freelancers found themselves hiring accountants. After years of valiant effort the union managed just this summer to win an exemption for those earning less than $100,000, as well as a partial exemption for those making less than $150,000.

Surely, a good nudge.

Reducing Unemployment

Except that the change in tax rates hurts a subset of freelancers who are doing well, and are, therefore, just on the brink of reducing U.S. unemployment, at least by one worker, with their first hire. If a New Yorker is successful enough to make $150,001 in contract income, he is successful enough to employ. But $150,001 is also the point where the UBT exemption disappears and his entire income is subject to the levy. Maybe, he thinks, that hire can wait.

A similar perversity affects freelancers when it comes to transportation. Years ago, Washington nudged employees at companies when it wrote a law that gives discounts on commuting on public transportation. Under last spring's economic stimulus package, Washington increased the incentive to use public transportation by granting bigger discounts for tickets.

But while such discounts are available to employee drones, dynamic freelancers don't get them. If freelancers want a tax break on travel for work, they must figure out how to take it as a deduction on their tax return -- more hassle.

New Obstacle

Even as the subway subsidy increased, an obstacle emerged in the form of a retroactive levy that taxes New Yorkers for doing the very thing the federal subsidy encourages them to do. The 0.34 percent rate for the new Metropolitan Commuter Transportation Mobility Tax sounds minor. But as Bloomberg News's Laura Marcinek has reported, the levy burdens freelancers, who can't count on an employer to do the paperwork for them.

To add insult to injury, freelancers must file to MCTMT authorities on a different schedule than they file for the income tax or the UBT: Jan. 31, April 30, July 31 and Oct. 31.

This new tax, like others, is explainable: New York is imposing the levies to maintain its fiscal health as other revenue declines. But the effect is enervating for job creators.

"Just about when we scored this really big political victory in getting UBT out of workers' way, we started getting notices on this new tax," Horowitz says.

What about that employment-related issue burning up the country, health-insurance affordability? By pooling members with an alacrity that health czar DeParle can only dream of, the Freelancers Union recently created health insurance with affordable premiums. The bad news: New York State then drove those very premiums up by retroactively raising a per-premium surcharge.

The point goes well beyond New York or its innovating union. Nudgers exhaust nudgees. Politicians who nudge often nudge recovery further away.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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