Not All Tax Cuts Are Created Equal

We know that a vast majority of Republicans in Congress have pledged to oppose any and all tax increases unless they’re matched, dollar for dollar, by reduced tax rates. They also seem to have taken a pledge to preface any mention of tax increases with “job-killing” or the equivalent.

But come January 1, all workers will face higher payroll taxes unless the one-year 2% cut agreed to last December is extended. Congressional Republicans, including two on the so-called Super Committee, seem inclined to let it expire.

“Not all tax relief is created equal for the purposes of getting the economy moving again,” says Super Committee Co-Chair Jeb Hensarling (R-TX).

Congressman David Camp (R-MI) has other objections. “No matter how well intended,” he says, tax reductions “will push the deficit higher.”

These are the same folks who were ready to let the government shut down unless the Bush tax cuts for high earners were extended. CNNMoney put the two-year cost at about $81.5 billion.

We didn’t hear a peep from the Republicans about driving up the deficit. Nor much concern about evidence of potential impact on economic growth.

The nonpartisan Congressional Budget Office ranked income tax cuts generally as the least effective of the 11 options it reviewed. A payroll tax cut for employees came in fourth.

Now is another tax cut fight brewing — this one centered directly in the ongoing jobs crisis.

Seems to me the comments above raise two main issues — the effectiveness of the employee payroll tax cut and the tax relief House Republicans want instead.

No one, to my knowledge, is arguing that an extension of the employee payroll tax cut will give our sluggish economy the boost it needs to start creating jobs for the more than 23.7 million unemployed and under-employed workers who need them.

The rationale, as I understand it, is rather that jobs will be lost if workers have to pay the full tax again because they’ll compensate by cutting back on spending.

The President has said this could cost the economy a million jobs. John Irons at the Economic Policy Institute puts the figure at 972,000 — still a significant dent in a job market that’s already shy about 11.1 million jobs.

The House Republicans’ latest job creation plan doesn’t delve into such specifics. Merely cites gross job creation figures from the hardly reliable analysts at the Heritage Foundation.

It does, however, specify two forms of tax relief.

One is a cut of at least 10% in the nominal corporate tax rate, apparently offset by some other specified changes in the tax code. The other is a “tax holiday” that would let corporations bring home profits gained abroad at a fraction of what they’d otherwise pay.

These measures would, in theory, enable corporations to invest more funds in creating jobs here. But there’s no evidence they’d do anything of the sort.

Corporations, after all, aren’t exactly short on cash. Many are sitting on big bundles of it. They’re creating jobs, as they always do, when they need them and where they can fill them at the lowest cost.

For multinationals as a whole, that appears to be mainly outside the U.S. No indication that the corporate tax rate cut the Republicans have in mind would change this.

For the “tax holiday,” we can look to past experience, since Congress put one into a job creation package in 2004.

As the Center on Budget and Policy Priorities reports, a number of studies found that it didn’t increase domestic investment or employment. In fact, some large companies that brought home billions turned around a laid off American employees.

CBPP argues — persuasively, I think — that another “tax holiday” would probably encourage corporations to shift even more of their income overseas.

For this reason, among others, the Joint Committee on Taxation estimates lost federal revenues at up to nearly $79 billion over the next 10 years.

If past is prologue, there’d be more American jobs lost too.

UPDATE: Shortly after I posted this, I saw a new brief on the employee payroll tax cut by the Center on Budget and Policy Priorities.

It includes an interesting table showing how much more, on average, workers in different occupations would pay if the cut expires. An even more interesting (to me) table showing how much workers in each state are receiving as a result of the cut.

CBPP makes the important point that other measures will be needed to boost job creation and economic growth. But letting the employee payroll tax cut expire without putting something more effective in its place would decrease consumer purchasing power by well over $110 billion.

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