Reid Jobs Bill Payroll Tax Relief Cost $200,000-$400,000 per Job in 2010

Reid Jobs Bill Payroll Tax Relief Cost $200,000-$400,000 per Job in 2010

February 23, 2010 0 Comments

The Reid Bill ($15B) is better than either the December House bill ($154B) or the Baucus/Grassley Senate Finance bill ($85B) simply because it has a smaller price tag. But, like the other bills, it will have very little impact on jobs.

The central piece of the bill is the temporary payroll tax cut (employer portion 6.2% of the 12.4% payroll tax) for the rest of 2010 if a company hires a person who signs a statement they have been unemployed for at least 60 days, with a $1000 bonus if the worker is still hired at end of one year. The 60 day unemployed requirement is both troubling and counterproductive. It creates tremendous incentives for fraud and abuse. It will force the government to create an enforcement mechanism, potentially going after both workers falsifying statements (including those legitimately unemployed for less than 60 days) and the companies that hire them. It favors some workers over others. It tries to influence who a company hires, not just whether it hires a new worker. And it will be an administrative nightmare, forcing the government to create an enforcement mechanism, potentially going after both workers falsifying statements (including those legitimately unemployed for less than 60 days) and the well-intentioned companies that hire them.

We need jobs–all jobs–not just jobs for certain people. The government has no business telling companies who they should hire.

The temporary, selective payroll tax reduction will have very little impact on jobs. In my experience, companies don’t hire people based upon a small, temporary tax break. That means most of the money will go to companies that already had plans to hire and most of the impact, if any, will be to influence who the company hires, not how many people they hire. But don’t take my word for it. Let’s look at the estimates from the Congressional Budget Office (CBO.)

CBO Estimate of Cost per Job of Stimulus Measures

The CBO released testimony today to the Joint Economic Committee (JEC) on impacts of different jobs measures. You can read the full testimony by clicking here. The chart above is from their report. CBO analyzed impact of the same payroll tax cut for 2010 but applied to ALL NEW HIRES (not just > 60 day unemployed).

Each dollar of government spending will increase TOTAL GDP (including the $1 of govt spending) by $0.40 to $1.30 over the next 5 years, only half of which will happen this year. That means each dollar of govt spending will impact private spending by $-0.60 and $+0.40, an average of $-0.10 over the full five years.
Conclusion: Somewhere between no bang for the buck and negative bang for the buck. Would be better off handing the unemployed guys $100 bills.

That makes the net cost per job between $100,000 -$200,000 for 2010. These are jobs that will pay $30-$50K per year. Very wasteful use of taxpayer money.

And remember, these CBO estimates are for cutting payroll taxes on ALL NEW HIRES, not just those > 60 days unemployed. The Reid bill have a much smaller impact than that because not all new hires will qualify for the tax cut. If half of new hires do (half of new hires have been umemployed for at least 60 days)–a gross overestimate–the cost would be $200K-$400K per job.

The jobs problem in America is concentrated in small businesses, which are always where new jobs come from. Their problem is that they have no access to working capital to meet payroll, buy raw materials and hold inventories and receivables. The reason is that banks have effectively red-lined small business loans in America ever since the government stimulus plans started compensating banks for doing certain things (e.g., loan modifications). Jobs won”t return until banks start lending to small businesses again. That’s where policy makers should concentrate their efforts.

JR

John Rutledge

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