Phoenix may well be on its way to recovery. Brookings recently estimated its rebound since the Great Recession to be the fifth best of the nation’s 100 largest metro areas. Its unemployment rate has dropped from 12% in 2010 to around 7.5% in May 2012. Bankruptcies have fallen dramatically and the housing market is clearly on the mend.
This is good news for a city that has been pummeled during the Great Recession. What’s especially good news is that as employers are continuing to get and stay lean, they find it’s better to hire “contract” labor rather than hire permanent employees: less hassle, no “hire and fire” issues, no overhead costs or health or retirement benefits.
And contract labor is likely to work just as hard as, perhaps harder than, an employee who may feel like he can relax a little, knowing that his paycheck is coming on Friday. The independent contractor knows his paycheck may not—unless he performs.
There’s another aspect to the “1099 culture” shift that is taking place: people are discovering, perhaps for the first time, just how much government is taking out of their paychecks. For the first time, they must file their own tax returns and often are chagrined to learn what their real tax liability is.
And that leads to another point: it’s a lot harder for the IRS to check up on all those 1099s. W-2 employees have taxes deducted automatically. Essentially, their employers are acting as agents of the IRS. Not so for 1099 people.
As Judy Morris notes:
1099 income is a whole lot harder for governments to trace and enforcement becomes a huge problem for the government. Precisely because 1099 tax revenues don’t consistently and reliably flow to the government in a timely manner, the government is at a disadvantage because it no longer has employers functioning as efficient and immediate tax collectors.
The economic calamity has also spawned a massive distrust of the government. Folks are simply fed up with paying taxes. When government is perceived a corrupt to the core and no longer offers value to taxpayers, taxpayers will seek ways to just opt out of the system. And thus, the underground economy is born.
All of this is to the good. In my opinion one of the most pernicious parts of government is the withholding tax. The growing 1099 economy is exposing it, perhaps for the first time to those who once were W-2 employees.