For far too long, U.S. politicians have been promising to bring jobs to Americans. They should instead be encouraging Americans to move to jobs.
The absurdity of tax incentives to "create jobs" reached new heights last month with Wisconsin’s deal to lure iPhone assembler Foxconn Technology Group -- which will reportedly cost taxpayers more than $100,000 per job. \
By promising to bring employment to depressed areas, politicians have convinced Americans that they have a right to a job where they live, and not that they should live where the jobs are. Even though labor-market incentives to relocate have increased over the past 50 years, with growing differences in wages and unemployment around the country, people actually move for work less and less.
In a global setting, efforts to attract jobs with subsidies will only become more and more expensive, and will likely result in outsize gains for those companies most willing and able to move. If we're going to subsidize something, we should use the money to jump-start the geographic mobility of Americans.
The U.S. tax system currently views moving costs in the context of business expenses, which means they can be either deducted from income or excluded if reimbursed by an employer. This makes the tax break most valuable to high earners who face the highest marginal tax rates. What's more, the deduction is available only to those who can prove that they took up a new job within a year of the move. So it's essentially aimed at rich people with plenty of job security, not younger, lower-income workers looking to escape a poor labor market. Less than 1% of all filers take the deduction, even though an estimated 10% of the population moves each year.
So how can we encourage the people who really need to move? Offer them a $15,000 relocation tax credit, which they would receive in cash even if they had no income in the given year. It should be triggered by a change in address beyond 200 miles, should not be contingent on taking up a new job within a specific period, and should phase out at incomes above $75,000 and for people older than 60. The amount would be enough to offset significant moving costs and initial living costs, while the constraints on age and income would limit windfalls to retirees and higher-income individuals. It could be paid for in part by eliminating the deductibility of moving expenses.
Will it work? Although high earners are highly sensitive to tax differentials, we know much less about low earners. But we'll never know how they would respond unless we give them the chance. Granted, it's possible that they would use the money to move to states with more generous benefits, rather than moving to jobs. Even if that happened, though, it would be no worse than the alternative, which is expanding the benefits base in the depressed areas where they already live.
In the tax system, there are always issues. Some people might try to split family units or engage in multiple moves to claim the credit more than once. Young people moving for education could also get a windfall. This could be controlled by allowing only one credit every five years. If some of the money helps people move to states with better educational opportunities, that wouldn’t be the worst thing in the world. It would certainly be better than providing a windfall to Foxconn.
The credit wouldn’t address one of the biggest obstacles to moving: the high cost of housing in some of the country's hottest labor markets. But affordable housing is a separate problem that needs to be addressed separately. We shouldn’t delay efforts to help workers until policy makers figure that problem out.
If the Trump administration and Congress are serious about helping lower- and middle-income workers, they must acknowledge the advantages of promoting mobility.
Irresponsible rhetoric that justifies staying put must be replaced with an emphasis on seeking out opportunity. Migration has reshaped the nation several times in our history, and it's needed now to boost the economy and improve the lives of our least well-off. Otherwise, we can look forward to even greater disparities and more disillusioned voters.
By Mihir Desai, an economist with the Mizuho Financial Group and Professor of Finance at Harvard Business School.
