http://worldcat.org/entity/work/id/9228537

Evaluating tax systems for financing the unemployment insurance program

PRI conducted a study for the National Commission on Unemployment compensation to help UI administrators evaluate tax systems and predict how changes in tax systems would change fund balances. Several models of UI tax systems were developed, and their predictive power was tested. The best models were used to predict fund balances under a variety of hypothetical tax systems. The adequacy of fund balances was also evaluated. Federal administrators now consider a fund adequate if the balance is a specified multiple of annual wages 'at the beginning of a period of relatively high unemployment.' Aside from the difficulty of determining when 'relatively high unemployment' begins, this measure treats solvency as the only criterion for evaluating fund balances. States can keep their funds solvent by maintaining arbitrarily high balances or by raising taxes immediately when benefit outflows start to rise, but neither method is desirable. Very high balances represent idle funds that could have been used productively by the employers who pay unemployment insurance taxes and raising taxes when benefit outflows begin to rise means high taxes in a recession. To reflect the actual--often competing--goals of UI fund managers, the study team evaluated UI tax systems by three criteria: the mean balance, the probability of insolvency, and the timing of the tax over the business cycle. A good tax system will produce a fund with a low mean balance and a low probability of insolvency, and will raise taxes in a boom rather than in a recession.

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