Strategic Communications and Marketing News Bureau

Will President Obama’s jobs plan work?

In an interview with News Bureau Business and Law editor Phil Ciciora, University of Illinois law professor Richard L. Kaplan, an expert on U.S. tax policy, discusses the tax policy implications of the American Jobs Act bill.

President Obama has proposed extending a cut in the payroll tax paid by employees to stimulate the economy. Will it work?

The current payroll tax cut is really quite modest – only 2 percent of wages subject to Social Security taxes. For an employee who earns the median wage, this translates into about $840 per year, and the president proposed increasing this amount by about $400. But this tax reduction is achieved over the course of the whole year through lower tax withholdings, so the resulting boost in take-home pay is probably not enough to make most people change their spending habits. In fact, the present payroll tax cut has been in effect since the beginning of this year, and there has been no discernible increase in consumer spending.

Also, remember that employees who do not participate in the Social Security program, such as many state government workers, receive no benefit from a reduction in the payroll tax that funds that program because they do not owe that tax to begin with.

The president also proposed cutting the employer portion of the payroll tax. Is that approach more likely to succeed?

Probably not. Cutting the employer portion of the Social Security tax was one of the provisions enacted last year in the Hiring Incentives to Restore Employment Act. That tax cut focused on workers who had been out of work at least 60 days. President Obama has proposed limiting the new tax cut to employees who have not worked for six months.

Clearly, the 2010 employer payroll tax cut did not make much of a dent in our unemployment rate. So even if Congress passes this employer tax cut as the president has proposed, very recent history suggests that its impact will be muted at best.

How are these payroll tax cuts financed?

For both the 2010 employer-side and the 2011 employee-side cuts, the uncollected taxes simply reduce the revenues that would otherwise have gone into the Social Security trust fund. As a result, that program’s fiscal condition actually worsened. While some consider this “trust fund” more of an internal recordkeeping device than a real funding mechanism, cutting payroll taxes means that Social Security’s long-term fiscal condition becomes more precarious.

President Obama claimed in his address that the changes he wants will all be “paid for” by other changes, but those other changes probably will not redirect any funds back to Social Security. In this regard, his proposal follows a too-familiar Washington pattern of seeking short-term benefits at the expense of long-term obligations and of eroding Social Security’s future solvency in the process.

And what is their impact on tax simplification?

All of President Obama’s proposals are time-limited, meaning that they would be in effect for short periods of time, usually one calendar year. As a result, the tax code will change every year for the next couple of years even if no additional tax legislation is enacted.

Annual alterations in the tax code translate into greater statutory complexity and increased compliance burdens for affected taxpayers, especially small businesses. Moreover, history is very clear that even conceptually straightforward ideas like tax credits for hiring new employees acquire numerous limitations, income-based phase-outs and other restrictions as they work their way through Congress.

The bottom line is that the president’s proposals prioritize some goal – in this case, job creation – over the objective of tax simplification, a situation that broadly characterizes our experience of the past several decades.

 

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