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Tax Cuts May Not be Enough to get the Private Sector Moving.
Obama’s jobs speech on September 8, 2011 sparked interest in the ears of both Republicans and Democrats. One of the highlights included yet another reduction in the payroll tax. Obama claims that this will put more money into the pockets of the American people, stimulate the economy, and decrease uncertainty. “It will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services. You should pass this jobs plan right away,” he said. Are these tax cuts enough to get this economy moving again? History shows a bleak outlook.
Obama’s first stimulus plan, which included a two-percent decrease in the payroll tax for employees from 6.2% to 4.2%, promised a booming economy full of job creation, increased consumer demand, and higher output. However, with zero net gain of jobs in August, a stagnant growth in GDP, and uncertainty looming, stimulus does not seem to be the answer. So the question remains, why won’t decreasing the payroll tax for employers and employees improve our economic condition?
Obamanomics fails to see the entire picture. According to J.D Foster of The Heritage Foundation, “payroll tax relief reflects the faulty Keynesian stimulus philosophy of putting money in people’s pockets that they would then spend, thereby increasing demand in the economy and ultimately increasing output and employment. The fundamental assumption of this theory is that since the economy is underperforming, total demand must be too low.” Theoretically, the stimulus’ purpose is to put money in the hands of consumers who will then inject it back into the private sector. However, Keynesian stimuli plans ignore the fact that when government takes money out of the savings market, the supply of savings for the private sector diminishes. Therefore, growth in the private sector diminishes, hurting output, private spending, and job creation.
According to Obamanomics, decreasing the payroll tax for both the employees and employers should have a positive effect on job creation. However, what it fails to lay out is that employers calculate how much they are willing to spend on employees regardless of taxes. Employees will directly AND indirectly bear the costs of the payroll tax. Employers build this into their cost of employment. That being said, in times of high uncertainty and temporary tax decreases, decreasing the payroll tax will increase the willingness to work, but not necessarily the demand for workers.
As Washington indulges in policies such as Obamacare and TEMPORARY tax reduction, America is cut off from the fuel it needs to run efficiently. Temporary tax reduction creates a realm of uncertainty for businesses that are increasingly hesitant to grow and hire. Also, tax cuts create an increase in our federal deficit (considering there has yet to be spending cuts elsewhere). Extending the employee payroll tax cut and cutting the employer payroll tax from 6.2% to 3.1% comes with an immense cost of $65 billion or more to the federal government. Coupled with Obamacare, businesses and people foreshadow increased government spending and higher taxes. This contributes to the current lack of growth the American private sector is experiencing.
In order to get the private sector moving and creating jobs, Washington needs to create a healthy atmosphere for businesses and entrepreneurs. This includes a significant reduction in federal spending, lasting tax reduction, and a pro-business attitude. If Washington does not invest its time in a federal weight loss program, America will continue to suffer the consequences.