Tax Changes in Obama’s Jobs Act: Creating Jobs or Causing More Uncertainty?

by Erin Ingraham

On September 8, President Obama stepped up to the plate and provided a substantial plan for job creation. While the hefty $447 billion price tag immediately placed the plan outside of the narrow boundaries Congressional Republicans would support, it could not be dismissed as a liberal spending giveaway. In an attempt to sway House Republicans to his cause, Obama included several short-term tax breaks that GOP members had backed in the past. In fact, the majority of the plan’s cost — $271 billion — can be attributed to tax relief. The Administration also made the clever move of turning the Republicans’ own tax arguments on them. At the October 6th House Financial Services Committee hearing, U.S. Treasury Secretary Geithner explained that if Congress let the President’s payroll tax cut expire in 2012, “the taxes every person with a job in this country pays go up by roughly $1,000 at the end of this year.” Flashback to 2010, when Republicans clamored that the end of the Bush tax cuts would be a $3.8 trillion tax increase on every American who pays income taxes.

While the tactics in creating and messaging the American Jobs Act have certainly been clever, the question remains, beyond the rhetoric is the plan actually good policy? One cause for concern is that the Jobs Act is almost entirely funded by tax increases on upper income Americans. This approach further complicates our nation’s tax code, which has become so convoluted that even high ranking government officials with tax experience cannot file their taxes correctly. As we have seen in the Simpson-Bowles proposal, the Bipartisan Policy Center Debt Reduction Task Force, and the Gang of Six proposal, conservatives and progressives can agree that a streamlined tax code with lower rates and a broader base is the best solution for our deficit problem and our economy. Yet Obama’s plan ignores this concept, instead layering on more tax loopholes and fiddling with rates.

It is not just Republicans calling for wholesale tax reform as an alternative to the Jobs Act. Democratic Senator Jon Tester (MT) opposes Obama’s plan because he would rather see an overhaul of the tax code than tweaks on the margins, and Senator Jim Webb (D-VA) would prefer to see loopholes closed than a tax hike on earned income. Other left-leaning members of Congress, like Senator Joe Lieberman (I-CT), oppose the President’s tax hikes because they are being used for new spending instead of reducing the deficit.

Furthermore, the American Jobs Act places a lot of emphasis on making the tax code “fair” rather than making it economically sound. In the President’s Sept. 19 speech outlining how he would pay for his jobs plan, Obama used the phrase “pay their fair share” or a variation thereof on eight occasions. Obama said of the tax burden shift in his plan, “This is not class warfare, it’s math.”  While the Congressional Budget Office has confirmed that Obama’s tax hikes add up to fund his plan, the reality is the top 5% already pay over 58% of the federal income tax burden, while 51% of American households pay no federal income taxes at all. In fact, thirty percent of income tax filers actually received more money back than they paid in taxes in 2009.

Lawmakers should be wary of bolstering a system where the majority of Americans receive federal benefits without having to pay income tax for them. This creates a perverse incentive for the majority of voters to support an increase in spending on government programs at no cost to their pocketbooks, while the minority bears the rising tax burden without seeing benefit improvements.

Finally, Obama’s plan finances temporary tax breaks with permanent tax hikes. Small businesses may get a few thousand dollars subtracted from their tax liabilities in 2012, but they will face higher tax rates for many years to come. This funding method could cancel out any job creating potential since businesses are wary of making long term investments in labor or capital when future costs remain opaque.  Right now, the financial markets are in constant turmoil over the future of the Euro, fears that gridlock in Congress will continue to exacerbate the debt crisis, and that a slowdown in China could mean significant cuts to world economic GDP.  Economists are increasingly predicting a double-dip recession. Businesses are facing unprecedented financial uncertainty, and are unlikely to take comfort in temporary tax breaks. What businesses want is certainty. Certainty in the tax code. Certainty in our plan for debt reduction. Certainty, of course, in financial markets and economic growth. As Megan McArdle of The Atlantic recently wrote, “The fact is, the president can’t do much more than tinker around the edges of a $14 trillion economy…” So instead of trying to change the economy, Obama and Congressional leadership should focus on what they can control – the tax code and the debt crisis. And one thing is for certain, permanent tax hikes are not the certainty families or businesses are looking for.

+ posts

Established in 1995, the Georgetown Public Policy Review is the McCourt School of Public Policy’s nonpartisan, graduate student-run publication. Our mission is to provide an outlet for innovative new thinkers and established policymakers to offer perspectives on the politics and policies that shape our nation and our world.

1 thought on “Tax Changes in Obama’s Jobs Act: Creating Jobs or Causing More Uncertainty?

Comments are closed.