Tax and Unemployment Agreement Leads to Jobs Growth

Agreement Will Create or Save 2.2 Million Jobs Despite Wasteful Tax Policies

SOURCE: AP/Paul Sancya

A job seeker fills out an application while attending a job fair in Livonia, MI. The Obama administration clearly had its eye on job creation in its willingness to accept bonus tax breaks for the rich in exchange for policies to sustain the economic recovery.

By Michael Linden, Michael Ettlinger | December 7, 2010

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Our analysis of the framework tax agreement that President Barack Obama announced yesterday, including additional tax cuts and an extension of unemployment insurance, finds that 2.2 million jobs will be the end result. In this time of economic distress, millions of new jobs are, of course, very welcome. It is, however, unfortunate that these jobs have to come from an agreement that is a balance between large, unneeded, bonus tax breaks for the wealthiest Americans and the needed continuation of unemployment benefits, middle-class tax relief, and additional help for the economy for the rest of us.

While the terms of the deal are understandable given the effective veto power of conservatives, it is unfortunate that policies aimed at the vast majority of Americans and at boosting the economy were held hostage to wasteful tax cuts for the wealthiest 2 percent. But the Obama administration clearly had its eye on job creation in its willingness to accept $133 billion in misallocated bonus tax breaks for the rich in exchange for policies to sustain the economic recovery and help the middle class.

We estimate that the deal as described would save or create 2.2 million jobs, excluding jobs associated with the extension of the broader-based portions of the Bush tax cuts on which all parties were agreed. To give an example of how the $133 billion used for the bonus tax cuts, including estate tax cuts, could have been better used: If it had been instead put to additional payroll tax cuts, 2.7 million jobs would be saved or created. Or alternatively, of course, the deficit could have been $133 billion less. (see table)

Methodology

The tax-and-spend provisions included in our jobs analysis of the framework tax agreement announced yesterday are based on our best understanding of the agreement, which we understand is comprised of a:

• Two-year extension of the Bush tax cuts for 98 percent of Americans
• Two-year extension of the Bush bonus tax cuts for the wealthiest 2 percent of Americans
• Two-year extension of the Earned Income Tax Credit and the Child Tax Credit at levels set in the American Recovery and Reinvestment Act of 2009
• Two percentage point cut in the employee payroll tax for one year
• Two-year extension of a variety of business tax provisions set to expire at the end of 2010
• 100 percent expensing of business investment for one year, then 50 percent bonus depreciation for the second year

The impact of the proposed estate tax provisions on jobs is negligible and not included on our analysis. In computing the entire cost of tax breaks to the wealthy, however, we include the difference between extending the 2009 estate tax rules with an exemption amount of $3.5 million ($7 million married) and a 45 percent rate with the framework agreement’s $5 million exemption ($10 million married) and a 35 percent rate.

To ascertain the jobs created by these provisions we use multipliers provided by the Congressional Budget Office and economist Mark Zandi. We average the low and high estimates from CBO and the Zandi estimates. We then apply a rule of thumb, based on CBO’s estimates of the macroeconomic impact of the American Recovery and Reinvestment Act, which posits that each 1 percent of gross domestic product creates 1 million new jobs, to arrive at our the jobs estimates.

Note also that the two-year cost of the 100 percent expensing provision for business investment, at $180 billion, is much larger than the 10-year budget cost. This is because the effect of the policy is to move future investment forward and as a result, tax revenues will be lower now, but higher later. Therefore, while it will cost around $180 billion in the next two years, over the 10-year period the net cost of this policy is likely to be about $30 billion.