Sunday, September 11, 2011

Dangerous Assumptions

The hype in advance of the President’s speech to Congress and the nation Thursday was that the president had a proposal to solve unemployment and fix the slowed economy. I have some real concerns about the speech and the assumptions that were made by the President and supported by news pundits. The press intimated that the president was proposing a suspension of the payroll tax for the next 12 months when in fact it would only be halved for 12 months.

Another assumption is that payroll tax savings will put money in people’s pockets which they will spend and that, in turn, will create jobs because demand will make companies hire to meet the increased demand. Let me offer an alternative thought as to what might happen to the non-stimulus money estimated to be between $1,000 and $2,000.

No doubt some will spend the $1000 right away as the president suggests. It is important to point out that the $1,000 will not be paid in one lump sum, but over the employee pay periods. If a person is paid every two weeks then the savings through the reduced payroll tax is about $38 dollars each for the employer and employee. Let’s say that the savings is twice that amount $2,000 so that every two weeks you have $76. 

I think people are concerned about their job and their bills. Their retirement account values have declined and the interest rates on savings is close to zero. Many people will, out of fear and uncertainty, put this money in the bank to try and save it to protect themselves and their families for as long as they can.  Many Americans have depleted their savings and even though the interest rates are close to zero they will feel better with some money in the bank. I think the great spending spree to jump start the economy will not happen.

The employer will have a reduced payroll tax for one year. By the way, calling it “payroll tax” really means, or is code for, “social security taxes”. The President doesn't want to be linked to any changes in social security so that is why he doesn't refer to this as social security. Another example of this word game is calling tax increases revenue enhancements as to what it really is a tax increase.

There is a one-time tax credit for hiring a long-term unemployed or a returning vet. These changes are for one year only. Most businesses, large and small, don’t make decisions based on one year. One of the big problems causing businesses to be reluctant to hire people is that they do not feel that they know what is going to happen in terms of rules, regulations and cost for existing much less future employees. The bureaucrats in Washington have not yet developed the rules for new laws so businesses don’t know how the new rules will affect them. Until businesses feel comfortable that they can depend on stability of how they operate their business they will not hire people to try and expand.

Again, payroll tax is code for social security taxes. The President is suggesting that we extend the reduced contributions for every American earning salary and wages for another 12 months. For two years we will, if it passes, underfunded social security, a program that most everyone agrees is in trouble of running out of money. I guess if you call it something different, that is “payroll tax” instead of “social security tax”, you don’t have to deal with the new problem under funding creates.

It is proposed, for the second time in two years, that teachers, police, and fireman receive money from the Federal government to save their jobs. Does it seem strange to you that all of the people who are going to get paid to keep their jobs are members of a union. We pay our taxes on a state and local basis to pay for teachers, police, and firemen and we would now be paying again out of our Federal tax dollars to keep them employed.

At the end of 2010 state and local governments employed over 16.6 million full time equivalents. In 2010, a mere 200,000 state and local workers lost their jobs. I'm not saying the the loss of a job can be devastating, it can but the public sector employees have not experienced the pain the rest of the country has over the last three years. We’re trying to protect their jobs, but what about the rest of the unemployed? Right the president wants to extend unemployment benefits to 99 weeks. Who do you think will make more money the teacher who's full pay is saved or the construction worker that has to try and live and support his or her family on unemployment?

Lastly, how do we pay for the $450 billion in the non-stimulus jobs bill that the President wants Congress to pass now?  The bill has not been written yet so perhaps we should think the way the former speaker of the house Nancy Pelosi felt about the healthcare bill, “we have to pass it to find out what is in it.”

Dan Perkins

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