Friday, September 23, 2011

Obama’s Jobs Bill - Payroll Tax Plan Double Down

Last year Congress moved to reduce the 6.2% FICA taxes for employees to 4%.  It was limited for one year, and would expire in December, but is now proposed to be extended through 2012.  Obama is also proposing to increase the cut to 3.1%, and additionally do the same for the employers.  This is the largest cost component of his plan.  So is it effective?

Obama's Payroll Tax Plan
Sept 8, 2011For employers, the proposal would halve the employer’s share of the payroll tax temporarily – to 3.1% from the current 6.2% – on the first $5 million of a firm’s payroll in 2012. About 98% of firms have payrolls of $5 million or less, the White House said in materials distributed before the speech.
In addition, its plan would completely eliminate payroll taxes for firms that increased their payrolls by adding new workers or increasing wages of current workers. That new break would be limited to the first $50 million of a firm’s payroll increases, measured against the prior year.

The basic problem with the belief that this will have an impact on jobs is that it is temporary.  No company can depend on factoring this into any long term hiring.  And we certainly hope jobs would last more than a few months.  Private sector jobs require long term sustained increases in business revenue to be self-sustaining, reducing or eliminating taxes on a job does very little to accomplish that.  The short term nature of the tax reduction does not help overcome the uncertainty, or as the markets drop this week might make you think certainty, of not having that long term increased revenue.  We need long term sustainable private sector jobs, not temporary.

It appears the belief is that this plan worked so well that we are going to double down on it. 

Plan’s Effect on Jobs Under Debate
Sept. 13, 2011 “There has been zero evidence that it moved the needle last year, and nothing suggests doing it again, albeit in a larger way, would increase hiring,” said a GOP aide.
At the same time, Republicans may find it hard to vote against a big tax cut, and in the current political climate, lawmakers are wary of doing nothing to address the lack of jobs. That is why some top Republicans are signaling support for renewing the payroll tax cut.

Will Obama’s Plan Create Jobs?
Sep 8, 2011 But with Obama’s re-election prospects hinging on the state of the economy, just how effective could a payroll tax break be in stimulating job growth?
“It won’t be,” said Curtis Dubay, senior tax policy analyst at the Heritage Foundation, a conservative think tank. “Let’s not forget it’s in place right now and the unemployment rate is 9.1 percent.”
Dubay said a better option would be, for example, permanently reducing the corporate tax rate, which is currently the highest in the world.
“Temporary tax measures never spur economic activity because families and businesses don’t make economic decisions based on short term tax breaks,” Dubay said. “When trying to achieve a specific purpose, it has to be done correctly and the payroll holiday is the wrong way.”

The main goal of this is the premise that “putting more money in peoples pockets” for them to spend will spur increased demand for products. More often the use of a single short term infusion of cash is to pay credit card debt or just pocket the savings.  Neither is a bad option, its just not the spur they are looking for. Since we have already pulled the income tax trigger, to the point that close to half the people in the US pay no federal income tax, the FICA tax is about the only game left in town.  The effect this will have on the already stressed social security system is hard to ignore, even with the protestations from Obama that this will be paid for.

Megan McArdle is a senior editor for The Atlantic
And there's rather a big poison pill for Congress in here: Obama has proposed no pay-for.  Or rather, he proposed that Congress figure out how to pay for it:
Basically Obama has said:
Obama: "Here's the deal: I take credit for the new spending now; you take credit for making politically unpopular cuts later."
 Select committees are turning into the Laffer Curve of the left: every time you want more money to pay for something, assign a committee to make unspecified cuts years in the future.

Republican complaints that the spending will happen and the pay-fors won't aren't unreasonable, and I suspect they'll get some traction with independents.

The unemployment numbers remain at 9.1% (much higher if you consider those who have given up looking), indicating the first shot using the payroll tax wasn’t and thus the double down will probably not be the silver bullet.  And since the method for financing this still seems hinged on debt, it does not help on that front either.  But then there is the ever popular class warfare approach of "tax the wealthy".  Yeah, they'll buy that one!

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