While President Obama travels the country raising campaign money and trying to sell his $447 billion (stimulus II) jobs plan, the academic literature says his proposals will have little, if any, impact on spurring job creation or aggregate demand.
In fact, his temporary tax measures would be offset by $460 billion in tax increases. The whole package undoubtedly would do more harm than good, as explained after research by the non-partisan Tax Foundation.
“Pass this bill! Pass this bill! Pass this bill!” Obama ordered Congress when he spoke to the recent Joint Session. While he says “pass this bill,” he’s passing the buck. “No games. No politics, No delays,” he declared.
The main elements of Obama’s American Jobs Act (AJA) include:
1. A 50 percent cut in employer payroll taxes for 98 percent of businesses and a bonus payroll tax cut for new jobs. Expected revenue loss: $65 billion.
2. A “returning heroes” hiring tax credit for veterans. The revenue loss has not yet been scored by the Congressional Budget Office.
3. A $4,000 tax credit for employers who hire long-term unemployed people. Expected revenue loss: $8 billion.
4. A consumer demand incentive, namely, a 50 percent cut in payroll taxes for more than 150 million workers in 2012. Anticipated revenue loss: $176 billion.
5. A business investment incentive, namely, an extension of the one-year allowance of 100 percent expensing allowance of qualified business deductions. Expected revenue loss: $5 billion.
Some of the act sounds good on the surface. But a review of “economic research says ‘jobs’ incentives tend to be ineffective in spurring new hiring,” according to an examination written by David S. Logan, Tax Foundation economist, formerly at the Brookings Institution. The business expensing provision “will only have a modest impact on economic growth because of its temporary nature,” Logan wrote.
The challenge is to determine “new” hiring from hiring that would have occurred without the incentives. One economic study found that at least 70 percent of tax credits given to employers are payment for workers who would have been hired anyway—without subsidies. Two other studies, Logan said, found that job creation tax credits do little to change behavior. One study found these policies are “hardly utilized when measured against the actual…hires that take place.” Another said more candidly: “Employers are happy to claim such credits,” but are “reluctant to change their behavior in response.”
When Obama strode into the Oval Office in 2009, the official unemployment rate was 7.7 percent with 11.9 million people saying they were without jobs and looking for work. Joblessness reached a peak of 10.6 percent in January 2010. Now unemployment is still over 9 percent with about 14 million out of jobs, according to the Bureau of Labor Statistics.
Isn’t the American Jobs Act an historic case of frantically trying to catch up with reality? It’s as if, finally, someone rudely shook Barack awake.
The purported jobs plan comes at a time of great unemployment among some of Obama’s most star-struck supporters, with blacks at 16.7 percent and Hispanics at 11.3 percent. Youth unemployment is also tremendously high.
Because unemployment has been considered the nation’s overriding problem for close to two years, the introduction of Obama’s American Jobs Act is not even better late than never.
“Businesses must weigh the short-term benefits of any tax incentives against the long-term costs of hiring a new employee,” economist Logan points out. The reason? Let’s say an employer is considering hiring an entry-level employee at $25,000. Depending on the employee, the business could be eligible under the AJA for $4,000 if he’s a non-veteran, $5,600 if he’s a veteran and $9,600 if he’s a battle-wounded vet.
These incentives would cut the first year cost of the $25,000 salary to as much as $15,400 (for a disabled vet). Over the next five years, however, that same employee would cost the employer (even if not a single raise were given) a total of $125,000 in salary, $14,500 in payroll taxes, and more if other benefits were provided. So, an employer would have to think carefully about his long-term costs.
Another concern about job tax incentives, Logan notes, is that a business could “game” the program. Although the AJA says employers can get a credit for hiring a qualified worker, it doesn’t say the newly hired can’t be laid off. So, an unethical employer could hire another to do the same job and get another multi-thousand dollar subsidy—a loss to the Treasury and no net reduction in unemployment.
In Los Angeles Sept. 26, Obama told fundraisers his administration knew “it was going to take years” to rebuild from what he suggested (passing the buck) was the “old worn-out ideas that were tried in the last decade.”
The American Jobs Act would cut the payroll tax rate in half for 2012, supposedly to put a little more money in people’s pockets.
This is based on the faulty assumption that the money immediately will be spent. Empirical research, however, shows that is not the case.
According to Logan, research in 2001 and 2006 showed when households got direct payments, they were, contrary to expectations, “very ineffective at increasing demand.” Only 25 percent of the recipients spent the money or said they intended to do so. The rest decided to save the money or pay off debt.
The AJA would extend the temporary measure, made in 2010, to allow firms to expense a major purchase rather than amortize it over a period of years. Economists favor full expensing because depreciation rules are often arbitrary. But full expensing loses its effectiveness if temporary. Temporary expensing does “little to increase employment or output,” Logan says. “If replicated, this would result in lowering unemployment” by as little as 0.7 percent.
“While it is likely that the tax incentive portion of Pres. Obama’s plan would deliver few jobs and little economic growth, the permanent tax increases that ‘pay for’ the tax cuts can do permanent harm to the economy.” The tax increases total about $460 billion over 10 years.
“By and large, these measures are not motivated by sound tax policy, but rather as a means of punishing politically unpopular groups” like “‘the rich,’ hedge fund managers, and oil companies.”
Whatever “meager benefits come from these temporary provisions will be swamped by the long-term impact of the permanent tax increases that are nearly twice the size of the tax cuts,” Logan concludes.
Actually, in line with a Sept. 19 speech, the Obama plan totals $1.2 trillion in new revenues, most of which comes from the vow to raise taxes back to the Clinton era rates on top brackets before the Bush tax cuts. Tax hikes would also include Warren Buffett’s proposal to up the tax on all millionaires.
Clearly, the Obama 2012 campaign is rushing ahead willy-nilly, not with cutting unemployment as its goal, but with class warfare as the central theme.