Sunday, September 11, 2011

Payroll Taxes - Temporary versus Permanent

The President's job plan has a bunch of stuff in it. One part reduces Social Security taxes on employers. This comes in a couple of forms. First, the rate is cut in half for a year for the first $5 million in payroll for a company. Second, the payroll tax is waived for new hires and on raises given during the year.

This is standard Keynesian stimulus. It is targeted, temporary and timely. It specifically targets smaller businesses where most of the job growth occurs. It is temporary since it is one year only. And it is timely since we need to deal with the unemployment now.

The question of course is will it work. I don't think so. If you've got $2.5 million in payroll today, the savings would pay for one person for a year. If you think that this is enough to get the company to hire one more person, then you must also believe that that person will get laid off when the incentive goes away.

The tax holiday on new hires and raises is helpful, but does saving 6.2% on either really tip that scale toward new hiring (or raises.) What it means is that for one year, an employer can pay for raises and new hires with 94 cent dollars. Again, if this will really tip the scales toward hiring someone, then it also means they will get laid off when payroll dollars cost 100 cents again.

Part of what drives hiring is investment. What drives investment is expected future profit. Profit depends upon both cost and revenue, and the proposed tax cuts help deal with the cost. However, the cost saving isn't permanent but the investment is. So I suspect that the investment won't get made. Without the investment you won't get the hiring.

We need a more stable business environment for investment to take off. That means permanent changes to the tax code and a stable regulatory regime. This part of the President's plan doesn't meet those criteria.

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