One cornerstone of Obama's jobs plan is a $120 billion payroll tax cut. This tax cut has been enacted already for 2011 and according to Obama, the claim is this tax cut put an average $1000 into worker's pockets.
This is a tax cut that reduced those Social Security contributions, what you see as FICA, the social security component, on your W-2, by 2% for 2011. That's right, they defunded social security by 2% for 2011.
Social security is calculated on gross income, normally 6.2%. This is why attacking social security is almost a crime. You've actually been putting money into your benefit your entire working life. It's capped to a wage base and for 2011 it's $106,800.
Additionally, median income is a tad misleading, for it's household income, on aggregate, instead of individual income. Additionally, it's not median wages, which since social security is a regressive tax, affecting wage earners disporportionately, using median income to estimate the tax benefit isn't quite right. After all, most of us are have nots, the median wage for 2009 was $26,261, much lower than the household median income of $49,777 for 2009.
First off, one might notice that 2011 hasn't been too good so far. We've had a 0.4% Q1 GDP and now a 1.0% Q2 GDP and job growth has been below 90,000 for the last four months. In August job growth was a zero, with an official 9.1% unemployment rate.
The Urban-Brookings Tax Policy Center estimated the payroll tax benefits. While the average benefit was $934, the lowest income quintile, representing 65.6% of all income earners, only received $178 a year from the payroll tax holiday. Considering personal consumption expenditures were over $10 trillion in 2010, and are roughly 70% of GDP, that $178 in pocket hardly seems to make a dent.
Even more obvious, a tax cut does not create a job directly, at least not one which puts $178 in the majority of income earner's pockets. The cost was projected to be $67.2 billion in 2011 and over 10 years, $111.7 billion.
Not much bang for the buck, since a boost to consumer spending will primarily be done by the ones living paycheck to paycheck. People who already have money to spare are more apt to simply save the money or pay down debt.
The above figures are in nominal, or not adjusted for inflation as well. From the CPI report, gas alone increased over 33% in a year, so any additional pocket cash went right into the gas tank.
Supposedly the employee side payroll tax rate 2% reduction would add 0.5% to annual GDP, or roughly $75 billion, and gain 400,000 jobs. But this is nominal GDP, not real, or adjusted for inflation. Additionally, if inflation rises or worse, we get yet another steep rise in energy or food costs, we have a very expensive stimulus taking up the slack from getting robbed at the pump.
How one claims an employee side payroll tax holiday increases jobs is due to increased consumer spending and that never ending infamous GDP multiplier. The rough thumb in the air rule is a 2-3% increase in annual GDP reduces the unemployment rate by 1%. This rule is also known as Okun's law. If I apply the above stimulative effect estimates to the current unemployment statistics, 400,000 less unemployed would have lowered the unemployment rate to 8.9% from 9.1%. Not a huge difference.
So, the question becomes why do this at all? One never knows but there are reports Obama has put reductions to Social Security and Medicare benefits on the table for draconian cuts, with the excuse of shared sacrifice in order to reduce the budget deficit.
But in terms of jobs, seems we would be better off hiring as many people as $120 billion can cover at $25/hr. Hand 'em all government issued scissors and put 'em out on the White House lawn as maintenance crew1. So what we displace a few goats. We need the jobs man.
1$25/hr is $50k a year. At the estimated $120 billion, that's $50k full time jobs for 2.4 million people. Scissors for 2.4 million people are $5 million. We'll assume the grass is free.