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Economists: Employer Tax Breaks May Be Weakest Link In Obama Jobs Plan

First Posted: 09/08/11 09:35 PM ET Updated: 11/08/11 05:12 AM ET

WASHINGTON -- President Barack Obama staked his presidency on a $447 billion jobs plan presented to Congress Thursday night, and a surprisingly large chunk of that plan -- some $65 billion -- is devoted to payroll tax cuts for employers.

When it comes to creating an economic turnaround, however, those generous cuts may well be the weakest ingredient in the pot. They may be easier to sell to business-friendly Republicans, but according to some economists, such employer tax breaks tend to offer significantly less value than, say, infrastructure spending or unemployment benefits.

The president's plan would slash by 50 percent the taxes that employers pay on their first $5 million in payroll, capped so that the benefits would fall mostly to small businesses. The plan would also eliminate those taxes altogether for businesses that brought on new workers or increased the wages of their existing workers.

"Pass this jobs bill and all small business owners will see their payroll taxes cut in half next year," Obama told lawmakers. "You should pass it right away."

The idea is simple: If a healthy business is weighing whether or not to make new hires, these tax breaks may give it just enough incentive to finally pull the trigger.

Yet some economists say many such businesses probably would have made those hires anyway, regardless of the tax breaks -- and the tax breaks happen to be expensive.

"That seems to me to be largely a waste," Dean Baker, co-director of the Center for Economic and Policy Research, said of the proposed payroll tax cuts. "You're handing money to businesses that won't do much that they wouldn’t have done otherwise. There's some incentive effect, but I worry just not much."

As Baker noted, the economy has been adding jobs -- it's just been losing them, as well. He said the businesses that are growing will add jobs whether or not the government sweetens the pot with employer-side tax breaks.

Still, while they may not be the best way to spend money, payroll tax cuts can only help an economy stalled at 9.1 percent unemployment.

"There are all these estimates of so-called bang-for-the-buck attached to these various stimulus proposals," said Isabel Sawhill, a budget expert at the Brookings Institution. The employer tax break "is not really well targeted, but it's a simple, straightforward way to give companies the incentive to hire more people."

The cuts may not be as effective as more direct spending, but they would certainly be more palatable politically, Sawhill said. "From a political perspective, the problem with infrastructure spending is Republicans will probably stonewall them," she said. "They'll have a harder time saying we don’t want a tax cut that would [help] small businesses."

On a dollar-for-dollar basis, however, an employee payroll tax break would provide a greater economic boost, according to economist Heidi Shierholz of the Economic Policy Institute, a think tank partly supported by labor unions.

"Reducing taxes on [workers] is more likely to put money into the economy than reducing taxes on employers who may be sitting on cash," Shierholz said.

The proposed jobs plan would slash worker payroll taxes in half at a cost of roughly $175 million.

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