Obama payroll tax cuts: Economists differ on how many jobs they'd create

The proposed payroll tax cuts amount to about half of the Obama jobs plan. Some economists say the cuts could add a million jobs, others call the strategy a waste of money.

By , Staff writer

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    President Obama addresses a joint session of Congress regarding jobs at the Capitol in Washington, Thursday, Sept. 8.
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At the center of President Obama's new jobs plan are two proposed cuts in the payroll tax on wages – one aimed at workers and one at employers.

Together, those cuts account for about half of the $447 billion plan to boost job creation in a weak economy.

Will the idea work?

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By one important criteria it has at least a shot at working: It might actually pass Congress. That's not a sure thing, but political analysts give the payroll tax cuts better odds of passing the Republican-controlled House than other elements of Mr. Obama's plan, including new spending on roads, schools, and summer jobs for teens.

If passed, economists say it should generate jobs by two channels.

The tax cut, which flows into worker paychecks, should boost consumer spending on goods and services by adding some $1,500 to the typical household income. And separate relief on the payroll taxes paid by employers might allow them to hire people sooner than they otherwise might.

Exactly how many jobs would be added is a matter of educated guesswork for economists.

Mark Zandi, chief economist at Moody's Analytics, figures that Obama's whole jobs package, if enacted, would have a meaningful impact on employment, adding nearly 1.9 million jobs to the economy during 2012. That could mean the unemployment rate falls from 9.1 percent to about 8.3 percent.

More than 1 million of those jobs would come from the payroll tax cuts.

Some forecasters don't see such big gains in jobs, however. "The government spent a lot of money trying to stimulate the economy and obviously has not succeeded," says Ed Yardeni, who heads an economic research firm based in Great Neck, N.Y. "I think a lot of the money has been wasted."

He says a better strategy would be to target the housing sector with a modest program – such as through a new incentive for people to buy homes as dwellings or as rental properties – since much of the economy's weakness can be traced to the housing bust.

To whatever degree the payroll tax adds jobs, they would come at a cost: The federal deficit would hit 8.7 percent of gross domestic product in 2012 if all of Obama's proposals pass, versus about 7 percent of GDP under current policies, Mr. Zandi estimates.

The tax break for workers would be an extension and an expansion of a temporary payroll tax cut that's set to expire at the end of this year.

The tax cuts for employers include one element targeted at "small" businesses. It would cut taxes in half on the first $5 million in payroll. It also includes an incentive for any firm to hire new workers. "The plan would completely refund payroll taxes paid on added workers," or on wage increases for current workers, the White House says. This tax relief would apply to no more than $50 million in new wages at a company.

Obama, in his Thursday address to Congress and the nation, sought to sell the tax plan by framing the alternative of doing nothing as a tax hike.

"If we allow that [employee payroll] tax cut to expire – if we refuse to act – middle-class families will get hit with a tax increase at the worst possible time," Obama said.

Zandi echoes that theme in his own analysis of the job proposals, saying the expiration of the tax cut and extended unemployment insurance will act as a drag on economic growth. (The White House plan also calls for continuing to provide extra weeks of insurance for jobless workers.)

"Not extending the programs will shave 0.9 percentage point off 2012 real GDP growth and cost the economy some 750,000 jobs," Zandi writes.

He sees the employer incentives as likely to be more effective than the tax credits in last year's HIRE Act, another piece of jobs legislation.

Similarly, the liberal Economic Policy Institute says that continuing the current tax breaks would prevent big job losses, and that adding the additional ones would help to "move the dial" on job creation.

But some business groups said that permanent streamlining of the tax code would do more for them than temporary tax cuts. And in an analysis of Obama's plan, Curtis Dubay of the conservative Heritage Foundation said that "businesses only hire new workers when they anticipate those new workers will increase their profitability over the long haul. A credit of a few thousand dollars, a mere fraction of the cost of hiring a worker, does nothing to change that calculation."

One final note on payroll taxes. Typically they're used to fund Social Security. So would the tax break deplete that program's finances? Technically, no.

"As with the payroll tax cut passed in December 2010, the American Jobs Act will specify that Social Security will still receive every dollar it would have gotten otherwise," through a transfer from the government's general fund, the White House says. That does push up the federal deficit, however.

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