Tax Deal: Job Creator or Deficit Inflater?
Policy + Politics

Tax Deal: Job Creator or Deficit Inflater?


From the moment President Obama announced his tax-compromise plan, it was apparent his chief motivation was to stimulate a stalled economy that produced just 39,000 new jobs last month. After the $857 billion package cleared a key Senate vote earlier this week, the president declared “this proves that both parties can in fact work together to grow our economy and look out for the American people.”

Economists estimate the tax-break and income-support deal Obama struck with the Republican leadership will generate approximately 1.4 million additional jobs in 2011. Administration-friendly analysts at the Center for American Progress put the total at 2.2 million jobs by counting those that will be preserved as well as those newly created.

The emerging consensus is that economic growth in the coming year will rise about one percentage point faster than previous estimates of 2.5 to 3 percent. That should be enough to generate hundreds of thousands of new jobs every month if all goes as expected, helping to reduce the 9.8 percent unemployment rate.

But not all tax breaks are created equal when it comes to creating jobs. The estate tax break that has incensed liberal members of the House of Representatives won’t create any. The House is expected to vote on the plan later this week.

The most productive part of the stimulus plan from a job-creation standpoint won’t come from any of the tax breaks. The extension of unemployment insurance for the long-term jobless — up to two years in states with high unemployment — will pump an additional $56.5 billion into the economy over the next two years and create an additional 450,000 jobs, according to economists at Moody’s Analytics.

Such income support programs for the jobless (comparable to make-work programs, which are not on the agenda) give the biggest boost to the economy since people who are unemployed invariably spend every cent of every dollar they receive, which generates another $1.60 of economic activity.

“Unemployment insurance is at the top of everybody’s list for what gives the most bang for the buck,” said Chad Stone, chief economist at the Center for Budget and Policy Priorities.

Among potential job-creating strategies, unemployment insurance is surpassed only by food stamps and federally-funded work programs, according to an analysis issued last week by Mark Zandi, chief economist at Moody’s.

Money That Won’t Be Spent
At the other end of the spectrum is the proposed estate tax relief for families inheriting over $5 million. They will pay a tax rate of 35 percent, compared to the 55 percent rate for estates over $1 million that was slated to go into effect on January 1. That will cost the Treasury an estimated $68 billion over the next decade, yet will generate no new jobs, or none that can be detected by the usual economic models.

 “The vast bulk of that money, at least in the short run, is not going to be spent,” said Gus Faucher, director of macroeconomics at Moody’s.

The rest of the tax breaks in the package are strung out between those two extremes. The temporary two percentage point reduction in the Social Security payroll tax is expected to generate more than $111 billion in new spending next year. That should generate an estimated 700,000 jobs, by far the most significant boost to employment prospects in the package.

Tax Cut Package
PolicyAmountNew Jobs
Income Tax Cuts
  • Extend Bush-era Tax Cuts
  • Earned Income Tax/Child Care Credits
  • Child tax credit
  • American Opportunity tax credits (college)
  • Extend 15% rate on CapGains and Dividends
  • Other (marriage penalty relief, etc.)
  • 207.5
  • 26.4
  • 71.7
  • 17.6
  • 53.2
  • 31.2
AMT Relief136.7
Expensing Corporate Capital Improvements113.8140,000
Recapture of Corporate Capex yrs 3-10-92
1-yr, 2 pct. Pt. Payroll Tax Cut111.7700,000
Estate Tax reduction68.1
Unemployment Insurance Extension56.5450,000
Special Tax Breaks (the "Extenders")55.3

Extending the Bush-era tax cuts, on the other hand, will have a much smaller jobs impact. That’s because the portion of the tax break that will go to households earning under $250,000 a year was already baked into most economists’ projections for next year since both political parties supported its extension.

Another component of the Bush-era tax cuts — lowering rates on dividends and capital gains to 15 percent instead of taxing them as regular income — will cost the Treasury $53 billion over the next decade. Yet it has less than one-fourth the job-generating potential of extending unemployment insurance because “most of that money goes to people who are not going to spend it quickly,” Faucher said. “It goes to upper income people who are going to save most of it.”

Corporations will be allowed to expense their capital investments over the next two years under the plan. While that may spur some manufacturing companies to make investments they wouldn’t otherwise make, much of that investment is pulled forward from the future, according to economists, and the job-creation is less even than the Bush tax cuts. The new tax break will cost the Treasury $114 billion over the next two years, though, slightly more than the payroll tax cut. Yet it will generate just 140,000 new jobs or just a fifth of the payroll tax cut’s total.