First, The O.C. is still the most entertaining show on TV. It's such a guilty pleasure. And they ended last night's show with a happy, normal moment, not more drama. I hope everybody has an excellent weekend. I will, so should you. But I always have excellent weekends.
The other half of of the proposal Sen. Kerry made last Friday, Jobs First.
The plan has three parts: a change in profit repatriation, a 1.75 percentage point reduction in corporate taxes, and a two-year employment subsidy. Last time I rambled on about the first two, now allow me to ramble on about the third and also about how the 10 million jobs number was derived.
While last time I babbled on anout some obscure and complex section of tax code, this deals with something everybody is familiar with, payroll and income taxes.
Reading though Kerry's proposal, about four times as much space is devoted to that obscure Internal Revenue Code change compared to the tax credit. Also, the research is much heavier there too. It's almost as if this was tacked on late.
New Jobs Tax Credit
Kerry's New Jobs Tax Cut (NJTC) is a remake of a 1977-78 program by the same name. He would give eligible employers an income tax credit that covered the federal payroll tax increase from hiring any new employees. That means a 7.65% credit on the first $87,000 of an employee's salary (actually, 1.45 percentage points of that is the Medicare tax that applies to the entire salary).
Kerry's plan would only apply to a thin range of companies though. It would only deal with small businesses that employed less than 100 people and only in industries that are affected by outsourcing, such as manufacturing or software. The full range of industries will be determined by "the Secretary of the Treasury — in consultation with the Secretaries of Labor and Commerce."
Also, since it is a credit against income tax, it would only matter to those that pay income taxes, basically companies that have positive income. So the company has to be in the right sector, it has to be small, and it has to be profitable. This seems far too narrow, and a number of companies that you would expect to benefit will probably miss out because they fail to meet one of the requirements. For example, a software startup would seem to be a perfect fit, but they are rarely profitable until later in their life. Or a manufacturing plant would seem to be appropriate, but it might employ more than 99 people already.
The 1977 NJTC had a couple of major difference. It applied to all sizes of firms from all industries, but the firm had to hire 2% more employees than in the base year. This was an attempt to prevent companies from using the credit against those it would have already hired anyways. It paid 50% of the first $4,200 of wages. The Targeted Jobs Tax Cut replaced it in 1978, and that was finally canceled in 1994 after receiving a poor review from a Clinton body.
The original program, even though it tried to prevent handing out subsidies for those inframarginal hires, wasn't deemed too successful at it. The problem is that the US labor market is very fluid. Over 4 million jobs are created each month and a little less are destroyed. In the natural course of churn an employer may hire a few people while another may be losing some. 1977 and 1978 were good labor years in general, with about 300,000 net private jobs a month, up from 190,000 a month in 1976, but it might be hard to attribute much of it to the NJTC as participation was low. In 1979 the labor market slumped again, to 143,000.
These employer subsidies will tend to affect jobs at or near the minimum wage the most. For those well above the wage floor, it would have to be the case that somebody looking for a job wouldn't take one at a lower price; the $80,000 a year programmer looking for work would have to be refusing to take $73,880. In a perfectly competitive labor market it wouldn't matter who gets the subsidy, but with a minimum wage, when given to the employer, it can effectively lower the wage floor. The marginal productivity of a worker sets a ceiling on wages. A worker cannot be hired for $5.15 an hour if he doesn't produce at least that much in output. However, if the employer is given 7.65% of wages back, the worker now only needs to produce $4.76 worth of output to break even. However, this reduction is only temporary. Somehow that worker needs to become more productive before the tax benefit lapses.
The 10 million jobs number
The number doesn't really rely on Kerry's plan. There is no connection between the two. No analysis on how many jobs the plan will create, just a determination by working backwards on how many jobs will exist if we return to the previous lows in unemployment.
First, the professors from Harvard, Lawrence Katz and Elizabeth Allison, take the average unemployment from 1999 and 2000, arriving at 4.1%.
Second, then they look at the BLS's prediction for the size of the work force in Jan 2005 and Jan 2009, getting 149.82 million and 157.05 million respectively.
Third, they calculate the gain in employment in the household survey. Taking the current umeployment rate of 5.6%, they predict the employment from the household survey in Jan 2005 will be 141.43: 149.82*(1-0.056). And taking the unemployment rate of 4.1%, they predict the household employment in Jan 2009 to be 150.61: 157.05*(1-0.041). This gives them a household employment gain of 9.18 million.
Finally, then they take the relationship between the growth in household employment and payroll employment from 1980-2000. That is for each 10 household job created in that time, 11 payroll jobs were created. So 9.18 million times 1.1 is 10.098 million, and there you get 10 million jobs.
I think this is absolutely silly. It's a five minute back of the envelope calculation based on nothing in the plan. Isn't this what we attacked Pres. Bush for when he just made up an employment number to not make it look like he would lose payroll jobs? Now Kerry just makes up an unemployment number pulled from the height of the tech boom.
I think the $22 billion price tag for the NJTC might also be attached to this figure too. You can subsidize about 9½ million jobs paying $30,000 for that much money.
Grading the plan
I want to like the plan. I want to feel good about a Kerry presidency. But I can't really get too excited about his Jobs First proposal.
For the repatriation, given the far superiority of the plan in one of Kerry's own sources, written by who he calls "two leading tax economists," I would have to give him a D+. Only $4 billion more than the alternative, but it would put the US in the unique position of taxing overseas profits immediately, something no other industrialized country does. Kerry correctly identifies how corporate taxes are coming down across the globe leaving the US to be a high-taxed country, but his proposal is to raise them ever further? However, for reducing the corporate tax rate, I'll bump him up to a C. If he would have just cut the coprorate rate 15% or something, I would have felt much better about the plan.
For the NJTC, I'll give him a C. It's an old plan, nothing original, but seems far more restrictive. I am unsure how many firms are going to be eligible. It goes away after two years. The worst case is that if costs a ten billion dollars from unexpectly revenues from the repatriation holiday.
Overall, I'd give him a C+, more because I want to feel optimistic and really want to like the proposal than because it really deserves it.
Kerry's tax break numbers
This is just my curiosity to see if anybody can figure this out.
They confuse me. Kerry's proposal gives some figures on how much of a tax cut small businesses can expect after counting in the NJTC and the raising of the marginal personal income rates on those above $200,000. There is confusion. Does he really mean above $200,000? That would require creating a new bracket because the closest one is at $143,500. Or will he just repeal the top two brackets ($143,500 and above). For instance, Brookings does their analysis by looking at the repeal of just the top bracket (income above $311,950 going to 39.6% from 35%) and also the second highest bracket (income above $143,500 going to 36% from 33%). But no matter how you interpret it, his numbers still don't add up.
From Kerry, "a small business owner making $100,000 who hires 1 additional worker making $30,000" will get a $2,295 tax break. That makes sense. 7.65% of $30,000 is $2,295.
However, I'm a little stumped at the others. "A small business owner making $250,000 who hires 2 additional workers making $30,000" somehow gets a $2,739 tax break. On the two workers, the tax credit amounts to $4,590 (2 times 7.65% of $30,000). That leaves a $1,851 tax increase to account for. If you look at only repealing above a literal $200,000, then that means $50,000 taxed at an addional 3% totaling $1,500, off by $351. If you look at repealing the top two brackets that would be an additional 3% tax on $106,500 totaling $3,195. Going at it backwards, how far would the tax repeal need to be rolled down to account for the remaining increase, it draws a line at $188,300.
Kerry's next example confuses me the same way. Using that $188,300 figure, I get closest, off by only $28.80. If anybody with more time can figure this out, that would be great. I wanted to do a more complete chart of the tax reduction and increases under the Kerry plan, but I can't without really knowing how this works.