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Will Tax Cuts Spark Hiring?

Read more than one story about the proposed tax deal struck by Senate GOP leaders and the Obama administration, and you’ll see wide-ranging disagreement among economists and even business owners about how much of an impact the deal will have on the job creation.

Yet with unemployment hovering around 9.8%, most at least share the hope that the deal will result in significant hiring. The $858 billion deal would also extend all Bush-era tax cuts and unemployment benefits, and offer other tax breaks for individuals (like a two-percentage-point payroll tax reduction for 2011) and businesses (like a research and development tax credit).

Those in favor of the tax cuts argue that keeping taxes low will prompt businesses to hire more. Businesses cited by a New York Times article said they would increase their payrolls in response to the cuts. Meanwhile, other economists fear that the constant flux of tax rates—most of which expire after two years—will discourage businesses from hiring because they can’t be certain of the tax situation down the road, according to a Wall Street Journal story.

Executives say it’s a lack of demand for their products that’s holding back hiring. A survey by Bank of America conducted this fall found that 61% of CFOs who don’t expect their companies to hire in 2011 cite insufficient demand.

Even if demand rebounds, some companies have streamlined processes and implemented new technologies that might help them keep headcount low.

So how, exactly, could tax cuts spur hiring? Two key ways, economists say: For starters, tax cuts for businesses leave companies with more money to invest in growth. Cuts for individuals give them more money to spend on products, increasing demand, which would, in theory, prompt the companies to hire.

Moreover, certain provisions of the tax deal would allow businesses to immediately deduct the costs of certain investments—new equipment or software– in 2011, which might encourage faster investment, says Moody’s Analytics chief economist Mark Zandi.  (Normally, businesses have to deduct those purchases over time.) “Businesses are piling up cash and have tremendous firepower but lack the catalyst to deploy it. [This] could jumpstart hiring,” he said.

Moody’s Analytics estimates that the unemployment rate will average 8.7% in 2011 compared with the 9.9% it would have been had the bill only included the provisions that were already widely anticipated, such as holding tax rates unchanged for taxpayers earning less than $250,000. Another analysis put together by Macroeconomic Advisers LLC estimates that, if the bill passes, the average unemployment rate in 2012 will be two percentage points below what it would have been had the bill not passed.

The proposal should help companies create jobs more quickly than they would have otherwise, but the benefits –and possibly those jobs –will disappear in a few years unless the economy is able to sustain growth on its own, says Chris Varvares, senior managing director of Macroeconomic Advisers.

Readers, what do you think? Will the tax cuts lead employers to hire?


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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (, retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at