Research Suggests Flaws In Obama's Jobs Act

by Leroy Baker, Tax-News.com, New York

26 September 2011

Research presented by the Tax Foundation (TF) has suggested that the proposed policies within President Obama’s recently-announced USD447bn plan to create additional jobs in a growing United States economy will have little, if any, impact.

At the centre of the President’s proposals within the American Jobs bill are cuts in employee payroll taxes in 2012. His plan would not only extend for next year the payroll tax cut, from 6.2% to 4.2%, which will otherwise expire in December, but also lower the tax to 3.1% for the first USD5m of a firm’s payroll. He would also introduce a payroll tax holiday for firms that increase their payroll, and extend 100% expensing of qualifying business deductions into 2012.

However, a review of the economic research recently presented by TF economist David S. Logan suggests that ‘jobs’ incentives tend to be ineffective in spurring new hiring, while the three most recent ‘demand-side’ tax cut plans have failed to induce new consumer spending. "The business-expensing provision, while a reasonable policy on its own, will only have a modest impact on economic growth because of its one-year limit,” he said.

He adds that much of the problem with the President's tax proposals stems from their temporary nature. "The same is true of both households and corporations - they don't make the kind of economic decisions the administration is hoping to see based on temporary changes in tax policy."

It is suggested that many Americans may choose to pay off debt or save their additional wages from a payroll tax cut, while income saved by business could be put to similar use.

Moreover, Logan points out that, although the American Jobs bill says that employers will receive a credit for hiring a qualifying worker, it does not state that a lay-off cannot accompany the new hire. A firm could fire an employee, hire a new one to do the same job, and collect up to USD9,600 for its efforts - which could result in a loss to the US Treasury with no net reduction in unemployment.

Furthermore, it is considered that, because the temporary tax measures would be offset by some USD460bn in permanent tax increases, the whole package could end up doing much more economic harm than good.

"While it is likely that the tax incentive portion of the President'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," concludes Logan. "By and large, these measures are not motivated by sound tax policy, but rather as a means of punishing politically unpopular groups such as hedge fund managers, oil companies, and anyone that falls under one of the shifting definitions of 'the rich.'"

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