Reuters, June 15, 2011, Wednesday

Reuters

June 15, 2011, Wednesday

Reuters

Analysis: tax cut for employers no panacea for jobs

NEW YORK (Reuters) - It may be the only stimulus option that would get through the divided U.S. Congress, but a proposal to cut payroll taxes for employers would probably fall short of its aim of kick-starting the weak jobs market.

The latest idea to pull the country out of its economic morass has run into skepticism from economists and some business owners, even before it takes shape in Washington.

Cutting payroll taxes for employers could provide a small boost to growth. But most agree that a temporary lowering of the rate will not convince companies to hire.

"There is no silver bullet to get people hiring," said David Rhoa, owner of Lake Michigan Mailers, a document management company in Kalamazoo, Michigan.

Of course, Rhoa, like most business owners, would welcome a tax cut. But he would reinvest the savings in his firm and give some of it to his 56 employees as a small pay raise.

"Anything that they do with that money short of burying it in the backyard should be helpful" to the economy, he said.

Without more demand from consumers, Rhoa says a payroll tax cut would not convince him to hire beyond the three new workers he already plans to add this year.

Robert Reich, a former secretary of labor and a vocal proponent of renewed heavy government spending to spur growth, says companies are "sitting on a vast cash hoard" of more than $1.9 trillion, which shows their reticence about hiring is not due to a lack of funds.

"Businesses are reluctant to spend more and create more jobs because there aren't enough consumers out there able and willing to buy what businesses have to sell," Reich, professor of public policy at the University of California-Berkeley, told Reuters in an email.

Differences over the effectiveness of cutting taxes to boost jobs are not new.

A tax credit under former President Jimmy Carter to stimulate new hiring in 1977-78 has been lauded by some economists. John Bishop, an associate professor of human resource studies at Cornell University, said it preceded a jump of more than 10 percent in private employment.

But critics say the impact was short-lived and highly expensive to taxpayers.

OBAMA POINTS TO SUCCESS OF 2010 TAX CUT

President Barack Obama on Monday praised a payroll tax holiday introduced earlier this year for employees -- but not for employers -- as helping the economy. The White House has said it is open to ideas about new measures.

Democrats' hopes of extending the duration of benefit payments for people out of work is likely to be opposed by Republicans. A plan to provide tax credits for firms investing in research and development was previously blocked.

Vice President Joe Biden discussed the idea of payroll cuts with lawmakers on Tuesday in the latest round of deficit reduction talks with a small group of legislators from both parties.

Republicans are not rushing to support a payroll tax cut for employers but might back it as a stop-gap measure, given their preferred option of a broad reform of the U.S. tax code is unlikely to be accomplished in coming months.

The U.S. unemployment rate rose to 9.1 percent in May, a concern for Obama as he gears up his re-election campaign.

Obama's two-year, $830 billion stimulus plan passed in February 2009 is credited with helping avert economic disaster. Now, as the recovery is sputtering, Republicans are deeply opposed to further spending.

In addition, the Federal Reserve's monetary stimulus options are limited when its bond-buying program ends this month.

The 2 percent payroll tax cut for employees, adopted only in late 2010, has cost public coffers an estimated $112 billion. Cornell's Bishop estimated the cut may have added 0.8 to 1.5 percent to economic growth this year.

Former Treasury Secretary and until recently White House Economic Adviser Larry Summers this week suggested raising the existing payroll tax cut for workers from 2 to 3 percent, and extending it to employers as well. He estimated the cost would be around $200 billion over 10 years.

Bill Rys, tax counsel at the National Federation of Independent Businesses, said cutting payroll taxes would help offset new, more expensive U.S. healthcare requirements.

Economists disagree on how many jobs a tax cut would create -- estimates range from 10,000 to 1 million -- but say they probably would not make a big dent on unemployment.

Robert Lerman, economics professor at American University and a fellow at the centrist Urban Institute, said the tax break should be limited to employers who add new positions.

"We want to expand employment but on the other hand we don't want to worsen the deficit too much," he said. "That is why the cost-effectiveness of these ideas is critical."

Still, Summers' proposal might bring the unemployment rate down by 0.6 or 0.7 percentage point, he said.

Supporters of a more targeted approach point to a law passed last year, known by its acronym, HIRE. Under the law, the federal government offered employers a 6.2 percent payroll tax cut for hiring unemployed workers. In addition, they received a $1,000 tax credit for retaining each new employee for at least one year.

Rhoa, the Michigan business owner, and other employers complained that such programs are complex and bureaucratic. Most importantly, they do not put money directly in the pockets of owners and employees, creating a delay in the stimulus effect.

Rhoa took advantage of the law to add employees. But he said he would have hired them anyway.

"Those weren't jobs that we created to hire those people. It was essentially a coupon from the federal government."

(Additional reporting by Rich Cowan, Alister Bull and Laura MacInnis in Washington; Editing by Dan Grebler)