How the tax cuts will help create jobs

Tax forms.

TEXT OF INTERVIEW

Tess Vigeland: First, the give-and-take on Capitol Hill over tax cuts. President Barack Obama and congressional Democrats spent another day haggling over the costs and benefits of a compromise. It would delay the expiration of all the Bush tax cuts for two years, extend unemployment benefits for one year and it includes new tax breaks for both workers and business investments.

Today the president said the compromise is good for the economy.

Barack Obama: Every economist that I've talked to or that I've read over the last couple of days acknowledges this agreement would boost economic growth in the coming years and has the potential to create millions of jobs.

We wondered how could that be, since most of this merely extends the situation we've already had for 10 years. Marketplace's John Dimsdale joins us from Washington. Hi John.

John Dimsdale: Hello Tess.

Vigeland: So help us understand how this compromise can create jobs.

Dimsdale: Well you're right, the Bush income tax levels have been around for 10 years now, and they haven't been doing much to create jobs, and neither have those extended unemployment benefits that expired at the beginning of December. But economists do see a stimulative effect from the 2 percent payroll tax reduction, along with those business breaks for investments and new plants and equipment. Chris Varvares at Macroeconomic Advisers has crunched the numbers, and he found that just those two changes, along with the one year extension of unemployment, would generate 700,000 extra jobs.

Chris Varvares: The primary mechanism by which this boosts economic activity is by putting money in people's pockets, who you expect to spend it.

Dimsdale: And it's the money in those people's pockets that will generate some jobs. But it's indirect. It first creates some demand for products, and then companies to meet that demand start looking around to hire and investing in new plants and equipment, which should create some jobs.

Vigeland: But, as you mentioned, the payroll tax is only one year. What happens then?

Dimsdale: Then job creation lasts only as long as the tax benefits, according to Varvares. Unless the economy gets a kick that helps it generate more jobs on its own, he expects the unemployment rate to return, after a year, to almost the level that it's at today. The same with those investment tax credits, they're a 100 percent write-off next year, but 50 percent in 2012, then they disappear. But even though they are temporary, Brookings economist Martin Bailey says that too should give companies more comfort to hire more people.

Martin Bailey: You're really trying to bring forward some of the spending by encouraging the businesses to invest this year or next year, rather than putting it off and waiting. It is a substantial sort of tax benefit to expense all of that equipment.

Dimsdale: But you know Bailey says there is one worry that might take some of the edge off of the job creation from the compromise: if consumers and companies worry about the higher deficits, and the taxes that are going to be needed in the future to bring them under control, they might just sock away their tax breaks, and not make those investments that are needed to create jobs. But all in all, Bailey says he thinks the compromise still is a net plus for the economy.

Vigeland: At least the two parts of it that are new.

Dimsdale: That's right. Just the investment business breaks and the 2 percent payroll tax reduction.

Vigeland: All right. Marketplace's John Dimsdale helping us to understand how these tax cuts are going to affect jobs. Thanks so much.

Dimsdale: Thanks Tess.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.

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