A better idea: Trying 2boost demand+job growth by extending income tax breaks 4the wealthy is like

for the wealthy is like "trying to help the sparrows by feeding the horses". There's a much more direct and ingenious way to
(1) boost consumer demand,
(2) accelerate job growth, and
(3) give tax relief to job-creating small business owners.

Republicans who made "WHERE ARE THE JOBS, MR. PRESIDENT?" their mantra during a very successful midterm election campaign propose to borrow $70 billion a year for ten years to extend Bush-era income tax cuts for income above $250,000 a year, giving an average $100,000 a year to each of the top 2 percent of income tax filers, over and above the thousands anyone who had exactly $250k income would get. But David Cay Johnston of the NY Times and many others have pointed out that true job-creating small business owners are just a tiny fraction even of Subchapter S corporations and other Schedule C/E income tax filers.

A much more direct and ingenious way to accomplish all three goals listed above is to spend an estimated $6,000 per full-time equivalent job on PAYROLL TAX REBATES ONLY for small businesses who expand their payroll spending above past levels (see the second snippet below).

Bearish NYU economist Nouriel Roubini proposes substituting such payroll tax cuts for the part of Bush-era tax breaks Democrats don't like (see the first snippet below).

Economist John Bishop of Cornell University has estimated that an ingenious 15 percent payroll tax cut targeted ONLY at ACTUAL SMALL BUSINESSES WHO RAISE WAGES OR HIRE NEW EMPLOYEES would cost the Treasury $6,000 per full-time-equivalent job (see the second snippet below). $70 billion a year in direct government payments ONLY to small-busines owners who spend $70 billion / 0.15 = $467 billion of their own funds on raises for existing employees and net new hires would pump $467 billion in new consumer demand and millions of new jobs into the economy in exchange for the same amount of money Republicans propose to squander in scattershot fashion primarily on tax breaks for coupon-clippers and medical-legal professionals who hire NO ONE and give raises to NOBODY.

A similar measure called the "New Jobs Tax Credit" and enacted into law in 1977 has been praised in peer-reviewd economic journals.

IMO, President Obama should take midterm election losses as a mandate to use the most cost-effective fiscal measures to boost employment IMMEDIATELY. Some economists have argued that the "largest middle class tax cut in history", a general payroll tax measure, was not targeted sharply enough on job-creating businesses and on consumer demand. But just letting those tax cuts expire while borrowing $700 billion for income tax cuts for the wealthy surely would be even LESS effective in boosting employment than retargeting say $140 billion in payroll tax cuts to small business job creators over two years.

IMO, Democrats would be COMPLETELY justified by Tuesday's message from voters in using RECONCILIATION if possible or other emergency legislation to pass extension of employment-boosting middle class payroll tax cuts, along with extension of income tax cuts for incomes below $250k, during the lame-duck session that begins in ten days.

This is the advice I would give President Obama, Nancy Pelosi, and Harry Reid if I had five minutes of their time.

WHAT'S YOUR OPINION?

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From http://www.washingtonpost.com/wp-dyn/content/article/2010/09/16/AR2010091605846_pf.html :

"WHAT AMERICA NEEDS IS A PAYROLL TAX CUT

By Nouriel Roubini. Friday, September 17, 2010; A17

... In the midst of an election with crucial implications for its ability to govern, can the Obama administration reduce the likelihood of a 'double dip'? The administration knows that it needs to fashion a revenue-neutral fiscal stimulus that increases labor demand and consumption. Its proposal to make permanent a research and development tax credit that dates to the 1980s, and then to enact a temporary investment tax credit allowing firms to write down capital investments at 100 percent of cost, are welcome -- but too modest a cure for what ails the economy.

A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years). Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. THAT HAS THE PROBLEM BACKWARD. ... To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do. President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. ...

Proportion is critical in designing the payroll tax cuts. Small and medium-size enterprises have had it rough the past three years. They are scrambling for operating capital as banks hold reserves tightly, and they face higher borrowing costs than large corporations when they do find willing lenders. To maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees. ... This will counter the argument that the higher income taxes funding these payroll tax cuts will hurt the wealthy and small businesses (many of which are run by those same high-income individuals) and their willingness to hire. Moreover, any cut in the payroll tax reduces the costs of operation and labor for all businesses. ...Low-income workers have historically shown a much higher propensity to consume when given extra money, so the payroll tax cut should be designed to provide a larger-percentage break to those on the low end of the income scale compared with the upper middle class. ...

Nouriel Roubini, chairman of Roubini Global Economics and a professor at New York University's Stern School of Business, is the author of 'Crisis Economics: A Crash Course in the Future of Finance.'"

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From http://economix.blogs.nytimes.com/2009/11/19/the-case-for-a-job-creation-tax-credit/
The Case for a Job-Creation Tax Credit
By JOHN H. BISHOP, Today's Economist; November 19, 2009, 3:57 pm

"John H. Bishop, a professor at Cornell University's Industrial and Labor Relations School, was co-author of a recent proposal on temporary job-creation tax credit published by the Economic Policy Institute.

Last week, President Obama announced that he was convening a jobs summit meeting, where policy makers would discuss how to reduce the country's high unemployment rate. One idea that has received attention lately--and which I heartily support--is a job-creation tax credit, which would make it cheaper for employers to hire new workers. ... The federal government has not tried this kind of policy since the 1970s. But the record of that policy gives hope that a temporary tax credit could help solve our unemployment problems today.

Here's how the credit could work, at least according to the proposal I wrote with Timothy Bartik at the Upjohn Institute: Employers would have to expand their payrolls on net to qualify for the credit, in order to prevent companies from simply firing and rehiring people. They would then receive a 15 percent rebate on any increase in their 2010 wage bill over their 2009 level. Firms would also receive a 10 percent rebate for the increase of their 2011 wage bill over the 2009 wage bill.

Based on Daniel Hamermesh's thorough review of econometric research on labor demand, Dr. Bartik and I have estimated that this temporary credit would increase employment by 2.8 million by the end of 2010. We also estimate that it would cost the federal government less than $6,000 per full-time equivalent job. Assuming these numbers are right, they make the policy an extremely cheap, efficient way to bolster the job market, especially relative to some other proposals, like public works projects.

The credit accomplishes so much so quickly because it enables the private sector to figure out which jobs make sense for the long run. Crucial decisions about whom to hire and for what kind of work are not made directly by the government. Rather, they are radically decentralized to the 6.5 million employers who would still pay 85 percent of the cost of taking on a new worker; who select, train and supervise the new hires; and whose vision defines the purpose of their firm's expansion. A similar two-year temporary credit--called the New Jobs Tax Credit--was established early in 1977, and studies have found it successful."

Here is the plan. The Republicans believe they can have
essentially have operational control of the Senate.

There are about 20 Demos up for reelection in the next
election. The Republicans are targeting especially
Blue Dogs and Centrists and making them an offer they
cannot refuse. In the next election we will not
challenge you with a strong candidate, call off any
outside groups from targeting you in your re-elect
campaign. In return you will vote with us(Repubs)
on all our major issues. This has been done before.
Therefore the GOP have enough votes to make legislation
go their way. This is done. The GOP was shocked that
3 members of the House Dems lost. Very Conservative
Voting Record.Miss. Ala and I forget the other.
I could not help but wonder had they been scratching
each others backs. Even though they are not the majority
the Republicans gain the working majority.

I picked this up on C-Span yeaterday. Weekly Standard

they are just plain dumb. What is their fallback if the Republicans welch on the deal? Nothing.

play the game and was wiped out.

and expose themselves for the plutocrats they are

Some say there's no chance of reconciliation in the lame duck session since no budget has been passed for the new FY. But Kevin Drum of MJ asks whether "last year's reconciliation instructions (are) still valid until the end of the congressional session".

See http://motherjones.com/kevin-drum/2010/07/lame-duck-hysteria .

Parliamentary rules are too arcane for me to figure out, but perhaps another DUer has a definitive answer.

on output and employment only to extensions of unimployment insurance. Extensions of bush-era extra income tax breaks ranked LAST among eleven fiscal policy alternatives. See my GD thread at http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x9518706 .

$467 billion extra consumer demand in 2011 and up to $700 billion in 2012 is IMO simply BRILLIANT! Roubini and Bishop both have stepped up with unassailable polciy proposals at just the right time.

:thumbsup:

They like that small businesses are dependent upon their corporate big brothers. Corporations have used small businesses to get what ever the corporations have wanted for years.

I could never understand why Democrats didn't make a play to bring small business to the left side of the political spectrum. But small business is grateful for whatever crumbs big business throws its way.

a huge pot of money that only SMALL businesses could get would SPLIT Republicans and expose those like Joe "I apologize, BP" Barton R-TX) who set records for fundraising from huge corporations.

to outsource their living wage jobs.

And unless I missed it, I saw no definition of a 'small' business.

details to remain brief enough formany DUers to be able to read the whole thing.

Another ESSENTIAL detail would be to cap the annual salaries of those whose raises would be eleigible for the rebate. Otherwise, thousands of pathologically greedy business executives would just give themselves raises and screw their long-suffering entry-level and lower-middle-class employees, who would quickly spent 100 percent of their raises on things they had not been able to afford.

They both apply to businesses of any size. The cap is implicit in Roubini's scheme, since it's about the rate of the payroll tax, which doesn't apply to high earnings; and it's in Bishop's scheme too, as he says in his proposal summary: "The credit should also be based on that portion of wages that is subject to Social Security payroll taxes to ensure that the credit does not apply to wages increases for very high wage earners."

http://www.epi.org/publications/entry/pm150/

to avoid more subsidies to Exxon and other big corprations who have the capaxity to QUICKLY exhaust any amount of funding and to game the system in the process. PLUS it has the political effect of splitting off the vast majority of Republican business owners from the huge corporate interests that own most prominant Republican leaders.

IMO details like this are not set in stone in concept papers and can be left to congressional staff to fill in.

What would you do?

.

The one way I can see of gaming the Bishop system, as it's described, is through outsourcing.

Say Exxon said it was outsourcing the jobs of 10,000 employees, and told the employees to apply for their jobs to the company to which Exxon is outsourcing. Exxon has a decrease in its payroll bill (it makes a payment to the other company instead), so claims no credit (but pays no penalty either), while the other company says "our payroll has increased, it's 10,000 more people than last year, we are owed a large tax credit", while in reality the number employed hasn't changed. I don't know if Bishop had proposals for avoiding 'bogus job creation' between companies like that.

It's true that small companies wouldn't be able to do such scams so easily, but, if the purpose is job creation, I'd rather allow any company to do it, and have some details that try to stop any 'job churn' fiddles. In fact, limiting it to small companies might encourage outsourcing, to small companies (eg in the example above, Exxon outsources to 20 different companies of 500 each). So rules to stop fiddles are probably needed anyway.

as the engine of most job creation? See, for example, http://www.oecd.org/dataoecd/10/59/2090740.pdf .

Some recent research funded by the Kaufman Foundation holds that it's really recently-started businesses that create net new jobs during their first ten years of existence, but the vast majority of those businesses are likely to be small or medium-sized enterprises (SMEs) . IMO there may be a danger that some "new businesses" credited for job creation in their first year by recent Kaufman research actually may be pre-existing businesses who for some reason changed their names and tax-ID numbers.

One commentator gives as an example of a small business that should NOT be targeted for fiscal help a family-owned liquor store that has been open for 30 years and employs almost exclusively extended family members. They can be reclassified at will as "new employees" --like a weepy John Boehner talking about "starting out sweeping up in his father's bar in Cincinnati" (see http://www.cnn.com/2010/POLITICS/08/31/boehner.profile/index.html ). This kind of small business could be disqualified by barring rebates on salaries of any extended family member of a business owner.

I would bar large corporations because they already have many issues with the IRS about classification of personnel as "independent contractors" paid on 1099s versus "employee test" personnel paid on W2s (see.http://biztaxlaw.about.com/od/independentcontractors/f/ic20factortest.htm ) It would be a simple matter for large corporations to reclassify thousands of "independent contractors" from 1099s to W2s just to grab undeserved rebates. Perhaps this issue could be addressed in legislation to bar rebates for personnel who had 1099 "independent contractor" income (from the business claiming a rebate) during the base year. Leaving such a loophole open in the law surely would ramp up artificially employment statistics for the next two years, though IMO that would be unethical. But why bother with large corporations at all given the literature on the sources of job creation?

I'd openly support this more because it would encourage them to stop abusing 1099...given a choice, I'd much rather be on a W2 and be a real employee with benefits.

What you see as a problem, I see as something we should be doing regardless of economic impact.

(see http://www.bls.gov/news.release/history/conemp_05242001.txt ). But is a vehicle to help the real economy rather than promote mere accounting changes the place to do it?

It sure is tempting to boost employment statistics artificially, through a loophole in what constitutes a "payroll increase" rather than a subcontractoor expense.

Yes, new jobs may appear more in smaller firms; but that doesn't mean that new jobs in larger firms are worthless. And if you set the limit at, say, 500, why should a new job in a firm employing 510 people not be worth it, while one is a firm employing 490 should be? If they manage to create some, they get a credit; if they don't, they don't, whatever the size of the company. And if a family firm pays more in payroll tax-liable wages than in the previous year, it has still increased employment, whether or not they are relatives.

risk their own money to boost consumer demand and job growth, not employers who are more likely to game the system and necessitate many more anti-fraud measures to overcomplicate legislation.

And does your "490 OK - 510 you're out" argument weaken as the cap is raised? What about capping eligibility at 5,000, or at 50,000? If it's a generic argument about marginal cases under any size cap, it's less persuasive IMO.

IMO, the larger the corporation claiming a rebate, the greater the likelihood they have gamed the system to carry out fraud rather than risked their capital to benefit the economy. With only $140 billion to spend, I'd rather prioritize small-and-medium-sized non-Mom-and-Pop businesses with much lower capacities for fraud.

the term "SME". (See the snippet below, from the SBA's website FAQ) . But according to many non-SBA sources, the formal threshold for a true "small business" is either 50 employees or 100 employees, depending on who's using the term.

The 500 threshold I'm using throughout this thread formally applies to "SMEs": "small and medium-size enterprises" according to http://en.wikipedia.org/wiki/Small_and_medium_enterprises ..

Like many others, I have used and will continue to use "small business" as a shorthand for "not a lorge corporation", even though the formal opposite of big business may be 'SME'. Whatever you call it, the threshold for most government efforts to help businesses--excepting large corporations--is 500:

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From http://www.sba.gov/advo/stats/sbfaq.pdf :

"WHAT IS A SMALL BUSINESS?
The Office of Advocacy defines a small business as an independent business having fewer than 500 employees. (The definition of 'small business' used in government programs and contracting varies by industry; see http://www.sba.gov/size .) ...

HOW MANY SMALL BUSINESSES ARE THERE?
In 2009, there were 27.5 million businesses in the United States, according to Office of Advocacy estimates. The latest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. Small firms with fewer than 500 employees represent 99.9 percent of the total (employers and nonemployers), as the most recent data show there were 18,311 large businesses in 2007.
Source: Office of Advocacy estimates based on data from the U.S. Dept. of Commerce, Census Bureau, and trends from the U.S. Dept. of Labor, Bureau of Labor Statistics, Business Employment Dynamics.

WHAT IS SMALL FIRMS' SHARE OF EMPLOYMENT?
Small businesses employ about half of U.S. workers. Of the 120.6 million nonfarm private sector workers in 2007, small firms employed 59.9 million and large firms employed 60.7 million. About half of small firm employment is in second-stage companies (10-99 employees), and half is in firms that are 15 years or older. Small firms' share of employment in rural areas is slightly higher than in urban areas; their share of part-time workers (22 percent) is similar to large firms' share (19 percent). Small firms' employment share remains steady since some small firms grow into large firms over time.
Source: U.S. Dept. of Commerce, Census Bureau: Statistics of U.S. Businesses, Current Population Survey, and Business Dynamics Statistics; and the Edward Lowe Foundation ( http://youreconomy.org ).

WHAT SHARE OF NET NEW JOBS DO SMALLBUSINESSES CREATE?
Small firms accounted for 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009. Much of the job growth is from fast-growing high-impact firms, which represent about 5-6 percent of all firms and are on average 25 years old.
Source: U.S. Dept. of Labor, Bureau of Labor Statistics, BusinessEmployment Dynamics; Advocacy-funded research by Zoltan Acs, William Parsons and Spencer Tracy, 2008 ( http://www.sba.gov/advo/research/rs328tot.pdf ).

HOW IMPORTANT ARE SMALL BUSINESSES TO THE U.S. ECONOMY?
Small firms:
-- Represent 99.7 percent of all employer firms.
-- Employ half of all private sector employees.
-- Pay 44 percent of total U.S. private payroll.
-- Generated 65 percent of net new jobs over the past 17 years.
-- Create more than half of the nonfarm private GDP.
-- Hire 43 percent of high tech workers (scientists, engineers, computer programmers, and others).
-- Are 52 percent home-based and 2 percent franchises.
-- Made up 97.5 percent of all identified exporters and produced 31 percent of export value in FY 2008.
-- Produce 13 times more patents per employee than large patenting firms.
Source: U.S. Dept. of Commerce, Census Bureau and Intl. Trade Admin.; Advocacy-funded research by Kathryn Kobe, 2007 ( http://www.sba.gov/advo/research/rs299tot.pdf ) and CHI Research, 2003 ( http://www.sba.gov/advo/research/rs225tot.pdf ); U.S. Dept. of Labor, Bureau of Labor Statistics.

that would be taxed incrementally more upon expiration of Bush tax cuts for the wealthiest 2 percent.

I just can't understand how Bob Schieffer could let Mich McConnell repeat the same outright lies about "hurting most of small business income" he's spewed since the summer. Here are the facts:

Three-fifths of the top two categories of small business income "flowed-through" to Form 1040 taxation accrues to filers with more than a million dollars in income, and 83 PERCENT OF PARTNERSHIP INCOME ACCRUES TO FILERS WITH MORE THAN HALF A MILLION DOLLARS IN INCOME.

(Calculation: ((0.54 x $133B partnership income) + (0.64 x $211B S corp. income)) / $344B = (71.82 + 135.04)/344 = 60 percent)

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From http://taxvox.taxpolicycenter.org/blog/_archives/2010/8/13/4603774.html :

"More on Individual Tax Rates and Small Businesses
by Joseph Rosenberg on Fri 13 Aug 2010

... Proponents of full extension point out that those high-income individuals receive a large fraction of net positive business income. (JCT has estimated that fraction at 50 percent; TPC's estimate is closer to 45 percent.) But what is less well known is what that business income consists of. How much represents the income of the neighborhood grocer or the owner of a small manufacturing firm? And how much represents the income of highly-paid professionals who take their income in the form of partnership shares, such as partners in law firms, accounting firms, and Wall Street hedge funds?

... The narrowest measure of small business income is that which is reported by nonfarm sole proprietors (on Schedule C of the IRS Form 1040). These would include the self-employed and many people running truly small family businesses, like the proverbial corner grocery store, but also would include some independent professionals (doctors, lawyers, independent consultants).

... The vast majority of business income reported by taxpayers in the top two tax brackets comes from partnerships and S corporations and these taxpayers report most of the net positive income from these sources ($400 billion, or nearly 63 percent of net positive income from such businesses). Not surprisingly, that income is also highly skewed within the top bracket. For example, just 17 percent of the $133 billion of partnership income in the top bracket goes to business owners reporting less than $500,000 of income, and 46 percent goes to those reporting less than $1 million.

Income from S corporations is even more concentrated--64% of the $211 billion subject to the top rate is for owners with more than $1 million in income...."