The Council believes that the Federal Unemployment Tax Act should be amended to include all tips in the definition of wages. In the absence of such an amendment, substantial numbers of workers in some States—those employed in restaurants, barber shops, beauty parlors, and the like—are denied the degree of protection they would acquire if their tips and gratuities were included in their wage records. Some workers may fail to qualify for unemployment benefits because, except for tips, they receive inconsequential remuneration. This sit uation is especially illogical because tips are frequently contemplated in the wage contract, are earned in the service of the employer, and are received for services generally recognized as performed in the interest of the employer.

The Council has recommended identical provisions for old-age and survivors insurance. From an administrative standpoint, it is highly desirable to have an identical tax base in both systems of social insurance. Tips are also included as taxable income under the Federal income-tax law.

While the Council urges that all tips be included for tax and benefit purposes either on an estimated or reported basis, it believes that-if the reporting basis is chosen—the employer should be protected from inaccuracy on the part of his employees. The Council believes that employees should not be allowed to change a previous report on tips when applying for benefits. Otherwise, additional assessments would have to be levied against the employer or benefits would be paid at rates higher than contributions collected would warrant. The Coun. cil considers both these results undesirable.


7. Contributory Principle To extend to unemployment insurance the contributory principle now

recognized in old-age and survivors insurance, a Federal unemployment tax should be paid by employees as well as employers. Employee contributions to a State unemployment-insurance fund should be allowed to offset the Federal employee tax in the same manner as employer contributions are allowed to offset the Federal tax on employers. The employee tax would be collected by employers and paid by them when they pay their own unemployment

tax The Council believes that part of the cost of social-insurance programs should be borne directly by those who are the beneficiaries of the program. The employee contribution is a significant factor in public understanding, for it demonstrates the insurance principle and the worker's right to the benefit and clearly differentiates social insurance from relief and assistance. The contributory principle is recognized not only in old-age and survivors insurance program of this country but also in the unemployment-insurance laws of all other countries. It is a cornerstone of social insurance.

The Council recommends the addition of an employee tax in unemployment insurance because of the fundamental concern of employees with the operation of this program. They receive the benefits; they are greatly affected by the administration of the laws; and they have a basic interest in determining legislative policy.

Employee interest in administration would be strengthened by employee sharing in the cost of the program. If they paid part of the cost directly, employees would have an even greater stake than at present in promoting methods of administration which will best assure the full exercise of their rights to benefits and the prompt payment of those benefits. An employee contribution would also stimulate employee interest in the prevention of improper payments, whether due to lax administrative procedures or to fraudulent claims, for they will want to avoid having their contributions dissipated unwisely. Students of British experience cite many instances in which labor representatives were better able to prevent abuses than were employers or officials.

Labor now complains that some State legislatures listen more attentively to employer groups than to those representing employees, because the unemployment-insurance program is considered by many to be financed exclusively by the employers. The employee tax would help put employees on a parity with the employer. On the one hand, if employees pay a part of the cost they will have a stronger voice in determining the amount of benefits and the conditions of eligibility; on the other hand, their direct contribution should make employees more responsible in their demands for higher benefits than if the cost falls on them only indirectly. Under the present arrangement, many employees believe that benefit increases are financed entirely by the employer and they tend therefore to exert their influence mainly toward payment of higher benefits without consideration of costs.

Since some of the employer's tax is shifted to the workers as employees and as consumers anyway, it would be far better to tax workers directly and achieve the advantages to be derived from the recognition of their part in paying the costs of benefits. Under the present law employers can shift at least part of the unemployment taxes to the consumer in higher prices or to the worker in Iower wages. In good times, the former is more feasible, while in times of unemployment the latter is more likely to occur.

Only two States, New Jersey and Alabama, now provide for employee contributions to unemployment insurance, although nine States have required such contributions at one time or another. Federal action is needed to extend the contributory principle in unemploy. ment insurance to all States. At the same time section 303 (a) (5) of title III of the Social Security Act should be revised to provide that, after the effective date of a Federal unemployment tax on employees, the employee contributions available for temporary disability benefits should be limited to the amount in excess of the minimum rate required for unemployment insurance. Employee contributions paid into the unemployment trust fund before that effective date would continue to be available for the State's disability insurance program.

Following the principles of the present State-Federal program, employee contributions to a State unemployment-insurance fund should be allowed as an offset against the Federal employee tax in the same manner as offsets are allowed against the Federal tax on employers. The employee tax would be withheld by the employer from wages and combined with the amount he is required to pay as an employer. Federal employees should contribute at the minimum rate required by the Federal Government for all covered employees but, in accordance with recommendation 3, the contribution would be collected by the Federal Government and used to reimburse the States for benefits actually paid on the basis of wage credits earned from Federal employment.

8. Maximum Wage Base To take acoount of increased wage levels and costs of living, and to

provide the same wage base for contributions and benefits as that recommended for old-age and survivors insurance, and upper limit on earnings subject to the Federal unemployment tax should

be raised from $3,000 to $4,200 13 A social insurance program must be adjusted periodically to basic xconomic changes. In a dynamic economy, some provisions which were appropriate when they became effective eventually become outmoded. This is what has happened to the limitation placed on the imount of annual wages subject to social insurance contributions.

In 1939, when the maximum wage base for contributions and beneits was set at $3,000, nearly 97 percent of all workers in covered employment had wages of less than $3,000 a year; contributions were hus paid on the full wages of virtually all covered workers. With the general rise in wage levels since 1939, however, the $3,000 limitation las tended to exclude from taxation part of the wages of a substantial proportion of covered workers. In 1947 about 18 percent of all overed workers had wages exceeding $3,000, and among workers who vere steadily employed throughout the year, from one-fourth to onehird had wages in excess of that amount. When the figures for 948 are available, these percentages will be even higher.

As wages continue to rise, the $3,000 limitation excludes a larger ind larger proportion of wages from taxation. Thus the system uffers progressive loss of income, which makes it increasingly diffiult to finance benefits related to current wages. Furthermore, when he limitation excludes a significant part of the wages, it is a source if inequality in the tax burden, for the ratio of taxes to wages is lower or establishments with high average wages than for those with low vages. In our opinion, the taxation base should be kept broad and the ax rate set lower than would be prudent with a more limited base.

The higher wage base is not only wise for revenue purposes but is lso desirable as a base for calculating benefits. In a contributory ystem, taxes should be paid on all wages which serve as a basis for enefits. It is undesirable, for example, to pay higher benefits to hose getting more than $3,000 than to those at the $3,000 level without it the same time charging more for the higher benefits. Thus if vages in excess of $60 a week (approximately $3,000 a year) are credited for benefit purposes, the tax base should be similarly increased. To relate benefits to wages for a large proportion of claimants. benefits should be based on wages above this $60 a week figure. If benefits are to vary with earnings for even as many as three-fourths of the claimants and if workers are to receive as much as 50 percent of earnings, in many States benefits would now have to be based on earnings up to $70 or $80 a week. If wages continue to rise, more and more States will be in this position.

13 While the majority of the Council favor increasing the upper limit to $4,200, some ivor keeping the limit at $3,000 and some favor increasing it to $4,800. Those who favor he retention of the present tax base feel that adequate benefits can be paid without any bange and cite as evidence the benefits already being paid by several States, such as New 'ork and California. An increase in the base would result in an increase in benefits only ► those in the upper income group. In the opinion of these members, payment of increased enefits to this group is not consistent with the basic principle of social insurance to provide basic floor of protection. Those who feel that the change in the top limit of taxable wages bould be to $4,800 rather than $4,200 accept the reasoning of the majority report, but point ut that the consumers' price index has risen by more than 60 percent, so that an income

$4,800 today has less purchasing power than an income of $3,000 had in 1939. Hence, aising the tax base and wages credited for benefits to $4,800 would not be a real increasewould,

in fact, fall short of maintaining the 1939 relationship between the wage base and rices. In substantial part, the reasons which were given by both groups in their dissents in t. I are applicable here. See appendix I-F, p. 64.)

The Council believes that a system of differential benefits related to the individual's contribution to production as reflected in his earnings supports general economic incentives and provides more adequate security than does a system which fails to take account of the individual's standard of living. The desire to return to productive work is well protected by a system which relates benefits to the earnings of the individual worker. Such a system permits higher benefits to those who are able to earn more and consequently, while protecting the desire to return to work, compensates for a greater proportion of total wage loss due to unemployment than is possible under a system in which a large proportion or all of the beneficiaries receive the same amount. For these reasons we believe it is important that, in the great majority of cases, benefits should vary with the wages earned by the individual worker and that the system should not become a flat benefit system because of benefit maximums which are too low in relation to current wages.

To take full account of increases in wages and prices, the limitation on taxable wages would have to be raised to somewhat more than $4,800. The Council, however, recommends that a part of the increase in wages be disregarded by raising the limit to $4,200 as a conservative adjustment to the rise in wage and price levels which has occurred since the $3,000 limitation was adopted. The $4,200 limitation proposed for unemployment insurance is the same as that recommended by the Council for old-age and survivors insurance. For administrative reasons it is desirable to have the same contribution base for both systems.

9. Minimum Contribution Rate The Federal unemployment tax should be 0.75 percent of covered

wages payable by employers and 0.75 percent payable by employees. The taxpayer should be allowed to credit against the Federal tax the amount of contributions paid into a State unemployment fund, but this credit should not exceed 80 percent of the Federal tax. Since no additional credit against the Federal tax should be allowed for experience rating, the States would, in effect, be required to establish a minimum rate of 0.6 percent on em

ployers and 0.6 percent on employees The Council believes that Congress should put a floor under State unemployment contribution rates at a point which will allow the majority of States to pay adequate benefits to most unemployed members of the covered labor force for a period sufficient in normal times to cover the duration of their unemployment. Under the present law there is no floor under the rates which States may charge. Credit allowances against the Federal tax are permitted to replace actual tax payments for the full 90 percent offset, as long as the allowances are based

on experience rating. States may thus reduce their contribution rates to a very low average rate and even to zero for some employers. (See table 10, appendix IV-E, for average employer contribution rates 1941-48.)

The present arrangement permits the States to compete in establishing low contribution rates for employers and therefore discourages the adoption of adequate benefit provisions, since proposals to provide more nearly adequate benefits in a given State are weighed against the effect of increased contribution rates on the competitive position of employers in that State. Yet a basic purpose behind the State-Federal tax offset plan adopted in 1935 was to remove interstate competition. Until the passage of the Federal act, the States were reluctant to require unemployment insurance contributions from employers within their boundaries unless other States had similar requirements. The Council's proposed minimum contribution rate is a return to the principle of assuring relative equality among employers in the various States

. It will remove an important barrier to the liberalization of benefits by requiring that all covered employers and employees throughout the Nation pay a minimum rate.

Some States will have to charge more than the minimum suggested by the Council if they are to finance an adequate system of benefits; others will be able to pay benefits somewhat higher

than the amount used by the Council in deriving the suggested rate. This situation will result from the considerable differences among the States in the size of reserves and in the unemployment rates which may be expected to prevail. Under the Council's recommendation, each State will continue to be responsible for relating its contribution rates to its own benefit payments and reserves. A State could thus impose a higher rate on all employers and all employees, or it could maintain a system of experience rating under which some employers would pay more than the minimum rate.

The Council is aware that some jurisdictions, such as Wisconsin, Hawaii, and the District of Columbia, will have unusually low costs if their past benefit experience can be taken as a reliable guide. Under the minimum tax proposed, these governmental units can perhaps afford to pay more generous benefits than can other jurisdictions. If, in the future, any State with benefits substantially more generous than others continues to build up a reserve, the Congress might consider some adjustment in the minimum rates required of them or allow all or part of the minimum employee contribution in such States to be used for other social insurance purposes. The Council believes that no special plan is needed now to provide for such a contingency, and none may ever be needed.

Appendix IV-A discusses in detail the method of arriving at the minimum rate.14 In general, it was necessary to assume certain illustrative benefit plans as “adequate” and then to estimate the cost of such plans in the various States. These costs were estimated under two widely differing hypothetical sets of economic conditions for the next 10 years, and the actual cost was assumed to fall within the resulting


A comprehensive study of the principles underlying the estimates of unemployment insurance costs has been made by W. S. Woytinsky, formerly principal consulting economist to the Bureau of Employment Security of the Social Security Administration, Principles of

Washington, 1948. This study has been the basis of the cost estimates used by the Council.

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