By Betsey Stevenson
The opinions expressed are her own.
What should we make of the President’s new jobs plan? Ignore the politics — will it pass? — and focus on the economics: If it does, will it get Americans back to work?
The centerpiece is a series of sharp payroll tax cuts. The usual problem with payroll taxes is that they largely subsidize existing workers. But this plan — three separate payroll tax cuts — is different.
The first tax cut is the most innovative: No payroll taxes at all for firms increasing their wage bill. In economics, all the action is at the margin. If we want people to do more at the margin — hire more people — then the incentives to do so should be targeted at the margin. We will get much more bang-for-our-buck by giving the biggest tax breaks to the hiring of extra workers.
Second, there’s bigger cuts targeted at small business. The logic here is simple: these are the firms whose hiring is most likely constrained by their cash-flow.
Third, the package extends and expands the current payroll tax cuts for workers which would otherwise have expired at the end of the year. Tax cuts for low income folks generate substantial further spending. In ordinary times middle class families usually don’t spend as much of each extra dollar, but these aren’t ordinary times. With one-in-eight families directly affected by unemployment last year, it’s likely they’ll be a bit more likely to spend the extra money. And even if people don’t spend the extra dollars, it will help them work off the debt overhang that is holding back spending.