Obama Jobs Plan: Will Tax Cuts Spur Growth?

Last Updated Sep 9, 2011 11:02 AM EDT

After the August jobs report was released, I said that President Obama blew it. This led to a deluge of comments, e-mails and vitriol. Over the course of 12 hours, I went from being called a "socialist" to "Tea Party sympathizer". (The wonderful Tess Vigeland, host of APM's Marketplace Money, pointed out that this was "objectivity defined!")


My big complaint about the President has been that job creation never made it to the top of his "to-do" list. With 14 million Americans still out of work 14 months before the next election, jobs has finally become the number-one priority for Mr. Obama. He used a prime time speech before a joint session of Congress to prove it.

The larger than expected $450 billion "American Jobs Act" is comprised of tax credits and spending measures that intend to "jolt" the US economy and create jobs. Since I have my doubts as to whether any spending measures will pass Congress, the question today is: will tax cuts spur growth?

The President's plan would extend and further reduce the employee portion of payroll taxes (that's the line item that says "FICA" on your pay stub) for 160 million working Americans. You probably forgot that payroll taxes were already reduced for 2011, from 6.2 percent to 4.2 percent of the first $106,800 of earned income. The new plan will cut the rate to 3.1 percent in 2012.

The idea behind these cuts is that workers will spend the extra money, creating more demand in the economy. The problem is that there has been a fundamental shift since the Great Recession: for the past year, Americans have been using any extra money to pay down debt and beef-up savings. There's no reason to believe that they will do anything different with an extra $20 bucks per pay period next year.

The other big piece of tax cuts is aimed at small business. The President's plan would cut in half the taxes paid by businesses on their first $5 million in payroll, targeting the benefit to the 98 percent of firms that have payroll below this threshold AND the plan would eliminate payroll taxes for firms that increase their payroll by adding new workers or increasing the wages of their current worker (the benefit is capped at the first $50 million in payroll increases).

These tax-cuts would surely improve the bottom line for businesses, but will these companies use the money to create more jobs? I'm not so sure. Business owners hire when they see an increase in demand for their goods and services. Without that demand, why would companies add new workers even at a slightly cheaper cost? Considering that the OECD slashed its growth forecasts for the US and companies are already sitting on a $1 trillion of cash, it's not clear that extra "found" money from tax cuts will be used to hire more.

What about the government incentive to hire? Again, I have me doubts. A recent New York Times article cited a study by John H. Bishop and Mark Montgomery, which examined a similar tax cut plan enacted in 1977. It found at least 70 percent of the tax credits were claimed for hiring workers who would have been hired even in the absence of the tax credit. In other words, this business tax cut is kind of like "Cash for Clunkers," where the government paid people to buy a car that they would have already purchased.

In the end, I suspect that the Obama plan will help make some incremental progress in the nation's jobs crisis, but not significant enough to satisfy any of us.


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    Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.

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