An Age-Set Tax Exemption (Thesis 13)

Imagine a 28 year old with 5 years of work experience, a college or technical school degree, minimal to no student debt, and a modest savings. Now make that the norm. Sounds too good to be true? With a Federal tax exemption for all workers up to age 23, this scenario can come true.

The Greatest Generation was drafted for World War II, then went to college, married, bought newly constructed tract housing homes in the suburbs, etc. This defines the 20th century idea of the middle-class American dream. But it all starts with a youth in war, working to the age of 20 to 22, then going on to college or starting a technical career. The new generations have no incentive to work while young, save, and then go to school (or not).

The latest generations start working later in life and marry later in life. As a byproduct, the median populace is having children later and having fewer children. Additionally, the financial well-being of the youth is imperiled by sharp costs of living: rent, food, and transportation. Increased university attendance translates to a college debt crisis, which recently received a band-aid, but not a solution. The youth need an incentive to work now, go to college later or finish college sooner. On another front, those who never plan to go to college and who on average have a shorter earning period and/or earning ceiling (construction/contractors for example retire earlier because of bodily wear and tear) it is imperative these workers get a firm of financial stance early in their youth. A tax exemption up to age 23 will incentivize the youth to participate in the labor force and nudge hundreds of thousands to pass on student debt. Society will see the student debt crisis ease and the youth integrate into society earlier in life.

Proposal: Exempt all workers aged 23 and younger from Federal income taxes up to $100,000 in Adjusted Gross Income (AGI).

Goal_1: Incentivize worker participation at a younger age. Worker participation rates declined over the last 70 years. Why? The American high school degree is virtually worthless, so Americans are flocking to universities or community colleges in historic numbers. However, according to Education Data, about 33% of all college attendees drop out. Therefore, a huge amount of youth are taking on debt and/or losing money via opportunity cost pursuing a highly inflated undergraduate degree.

The youth need an incentive to complete their undergraduate education sooner or not attend at all. This tax exemption will incentivize many unsure to-be high school graduates to choose a trade (money and work experience) over debt and a degree. Better yet, many youth will work jobs THAT ARE CURRENTLY UNDERSTAFFED DUE TO A "LABOR SHORTAGE," earn their independence AND save for university if they choose to after the tax exempt period is over. If they choose to attend university, they will do so on much better financial grounds and take on less debt.

In a recent article, the Brookings Institute frames the labor shortage issue between an aging workforce and narrow immigration policy. I respect the perspective, but a homegrown (and immigrant) youth can fill the positions in industries hit hardest by the labor shortage, construction and retail. The incentive may push hundreds of thousands to choose a path of work during and after high school.

The above graphic shows labor participation for age 16-19 youths falling from the 50% mark between 1965-2000 to 30% between 2010-2021. Additional Bureau of Labor Statistics data show a less severe downward trend among youths age 20-24 falling from 77% to 70% between 2001-2021. This trend is present in age groups 25-54, but narrows as the age increases. Labor participation increased only in the 55-older age bracket(s).

If Brookings was speaking to an aging work force, they were referring to labor participation, which does not accurately reflect the labor pool, especially in the construction and retail industries. As a matter of magnitude, there are fewer older people than youths alive (by attrition: disease or mishap) and a 33% labor participation among the country's largest age brackets, the youth, is the most consequential factor contributing to the labor shortage- not increased labor participation rates among older Americans.

Goal_2: Incentivize integration into society at an earlier age. Work is a bludgeon of reality. It grounds human beings to a collectively agreed-upon reality. The youth enjoy too much free time and too many comforts. This causes societal malaise and increases psychological degradation. Self-harm rates and youth pill prescription rates are extremely concerning. A working environment may be one piece of the solution to save the youth from themselves.

Goal_3: Increase the financial well-being of the youth. The new generations complain about how the middle-class dream is too expensive. They compare their lives to the lives of the Greatest Generation and the Boomer Generation. Those generations worked at younger ages at far greater rates. This policy would alleviate the pressure of taxation from the youth's early earning potential. This policy could reverse trends in home ownership, marriage, children, etc. by getting "life" started earlier.

Caveat: The exemption does not extend to Federal Insurance Contributions Act (FICA) taxes. The actuarial condition of public welfare is on a course to bankruptcy, so any and all contributions are required.

Next

An in-depth study will explore the context of the issue. More importantly, I will model the policy impact on college attendance, savings, and worker participation rates among the youth. Ultimately, I'd like to forecast how the policy may impact financial planning, career planning, and family planning.

Task: model a projection of increased labor participation given the new incentive- tax exemption.

The Context in Charts & Graphs

Census Bureau data show the date of first marriage is trending sharply upward. It will likely stabilize if economic conditions remain. The median age will fall if another major war breaks out.

CDC data show the age distribution among first births is trending higher toward the 25-29 and 30-34 age brackets. Most significantly, teenage pregnancy is down.

Tertiary Education: the OECD defines tertiary education as "all formal post-secondary education, including public and private universities, colleges, technical training institutes, and vocational schools." The proportion of Americans attaining an education beyond high school doubled between 1990 and 2020. As the globalization of labor supply extends to more industries, labor-side competition increases in kind, increasing employer-side labor eligibility prerequisites.

According to Education Data, "The rising costs of college tuition outpace the rate of inflation 171.5%."

Meanwhile, student debt continues to rise.

Additionally, the income to debt ratio is rising showing wages are not proportionate to the cost of the degree (at least initially).

Census Bureau data show homeownership among Americans under the age of 35 and between age 35-40 experienced 40 year lows during the Great Recession Recovery.

References:

1. Population Reference Bureau, U.S. Census Bureau, American Community Survey (accessed January 2021): https://www.prb.org/usdata/indicator/marriage-age-women/chart

2. OECD (2022), Population with tertiary education (indicator). doi: 10.1787/0b8f90e9-en (Accessed on 26 September 2022): https://data.oecd.org/eduatt/population-with-tertiary-education.htm#indicator-chart (Accessed 9/26/2022)

3. Mathews TJ, Hamilton BE. Mean age of mothers is on the rise: United States, 2000–2014. NCHS data brief, no 232. Hyattsville, MD: National Center for Health Statistics. 2016: https://www.cdc.gov/nchs/products/databriefs/db232.htm#:~:text=Data%20from%20the%20National%20Vital,pronounced%20from%202009%20to%202014.

4. Hanson, Melanie. “Average Cost of College by Year” EducationData.org, January 9, 2022: https://educationdata.org/average-cost-of-college-by-year (accessed 9/26/2022)

5. Hanson, Melanie. “Average Student Loan Debt by Year” EducationData.org, January 19, 2022: https://educationdata.org/average-student-loan-debt-by-year (accessed 9/26/2022)

6. Dany Bahar and Pedro Casas-Alatriste, "Who are the 1 million missing workers that could solve America’s labor shortages?" Brookings. July 14, 2022. https://www.brookings.edu/blog/up-front/2022/07/14/who-are-the-1-million-missing-workers-that-could-solve-americas-labor-shortages/ (accessed 9/26/2022)

If I missed a reference here, the source is hyperlinked in the article itself.