Academic Research Suggests That the American Jobs Act Will Produce Few Jobs

September 20, 2011

Our new report analyzes President Obama’s $447 billion proposal to encourage businesses to hire new workers and stimulate spending. Our review of the academic literature suggests that the proposed policies will have little, if any, impact. Indeed, because these temporary tax measures would be offset by some $460 billion in permanent tax increases, the whole package could end up doing much more economic harm than good.

The key tax measures in the American Jobs Act include hiring incentives for new workers, a 50% payroll tax cut for workers, and a business investment incentive that allows for 100% expensing of qualifying business deductions.

Job creation tax credits: A review of the economic research suggests that “jobs” incentives tend to be ineffective in spurring new hiring. Although the American Jobs Act says that employers will receive a credit for hiring a qualifying worker, it does not state that a layoff cannot accompany the new hire. Simply put, a firm can fire an employee, hire a new one to do the same job, and collect up to $9,600 for its efforts – which results in a loss to the Treasury with no net reduction in unemployment.

Payroll tax cut: The three most recent “demand-side” tax cut plans failed to induce new consumer spending. The Permanent Income hypothesis suggests that if a consumer perceives a change in income to be temporary, the increased amount of money in their pocket will not lead to a change in spending behavior. In other words, people are not likely to purchase a big-ticket item or make a long-term commitment because of a one-time cash windfall.

Expensing: Economically, allowing a business to expense 100 percent of certain investments is good policy. In general, economists favor full expensing over depreciation, especially since depreciation rules are often arbitrary and have little relationship to the economic life of the investment. However, full expensing loses its economic effectiveness if it is temporary.

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.

Permanent Tax Increases: The tax increase measures total roughly $460 billion over ten years. They include:

  • Limiting tax deductions for high-income taxpayers. With more than 60 percent of taxpayers in the 33 percent tax bracket having business income while more than 82 percent of those in the top 35 percent bracket having business income, high-income taxpayers may be few in number but earn the vast majority of all private business income. It’s hard to imagine that these business owners would increase hiring in the short term in the face of a permanent tax hike.
  • “Eliminate tax breaks” for the oil and gas industry. Designed to punish an unpopular industry and not grounded in good tax policy, these proposals would for the most part deny oil companies the ability to expense their intangible drilling costs, which is similar to the R&D tax provisions available to other industries. Another provision of the Obama plan would expose oil companies to double taxation on their foreign earnings, while yet another would deny the Manufacturing Activities Deduction to some industries over others, a dangerous precedent.

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. 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.’

Read the full report here.


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