The new tax cut compromise between the Obama administration and congressional Republicans, which will add $593 billion to the $1 trillion federal deficit, is now also being touted as a back-door stimulus plan. Some economists have estimated that when you add up the deal's different provisions, it will create 3.1 million new jobs. Unfortunately, the model on which those forecasts are based makes some flawed assumptions that lead to an overestimation of the positive effects.

The $954 billion deal can be thought of in two pieces, according to the Center for American Progress. The first is a $133 billion tax cut for the rich -- payback for the donors to Republican campaigns. That portion includes $120 billion in lower taxes for the top 2% of U.S. households, plus $13 billion in estate tax savings. The remaining $821 billion consists of government cash for unemployment benefits, tax cuts for the middle class and small-business job-creation incentives.

The center estimates that over the next two years, the deal will "save or create" 3.1 million jobs, based on the Congressional Budget Office's estimate that each 1% of GDP growth adds a million new jobs, and using calculations from the CBO and economist Mark Zandi about how much of each type of stimulus spending will boost overall GDP.

The 3.1 million jobs estimate from the center breaks down this way, ranked in order by the number of jobs saved or created:
  • Extending the broad-based Bush tax cuts (for the bottom 98%): $360 billion cost, 940,000 new jobs
  • Payroll tax cuts (2 percentage-point reduction): $120 billion cost, 700,000 new jobs
  • Unemployment insurance extension: $56 billion cost, 520,000 new jobs
  • Bonus tax cuts for top 2%: $120 billion cost, 290,000 new jobs
  • 100% expensing/bonus depreciation: $180 billion cost, 260,000 new jobs
  • Refundable low-income tax credits: $38 billion cost, 220,000 new jobs
  • Business extenders such as R&D tax credit: $80 billion cost, 160,000 new jobs
Not Enough Job-Creation Bang For the Deficit-Boosting Buck

What's striking is how much greater the job-creation impact is per dollar spent for some of these programs than for others. For example, extending unemployment insurance creates one job for every $107,692 spent, while it takes nearly four times more -- $413,794 in tax cuts for the wealthiest 2% of Americans -- to create a single job. So much for trickle-down economics.

But the big problem with this economic model is that it grossly exaggerates the number of new jobs created. For example, the same formulas were used when the Obama administration claimed that the $787 billion American Recovery and Reinvestment Act would save or create 3.5 million jobs at a cost of $224,857 per job. The CBO's follow-up report last month estimates that the law saved or created between 1.4 million and 3.6 million jobs. This range is so wide that it doesn't provide much reassurance about the actual results -- but it provides political cover for all sides.

Meanwhile, if the Recovery Act did save or create jobs, why is the unemployment rate back up to 9.8%? The simple answer is that government doesn't create private-sector jobs -- business does. And with profits expected to hit a record $1.66 trillion in 2010 and corporate cash balances at $1.84 trillion, businesses are doing just fine by not creating jobs. Unfortunately, there's nothing in either the older stimulus package or the new tax compromise to change that.

What's really needed to create job growth is transformative innovation -- a development like the Internet in the 1990s that created entirely new industries and contributed 22 million new jobs to the economy. I interviewed 17 CEOs of promising tech startups in October, and I heard repeatedly that tax incentives aren't going to factor into whether they hire or not. What will matter for them is their ability to innovate and compete, something this tax cut compromise won't help with.

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CAPTNMC05

How about a special tax on companies that send business overseas because of cheap labor.Keep the jobs here and give them a tax break that would off-set the costs of doing business outside the U.S.
The JUNK we get from overseas is unacceptable in the countries that make the products for us.Let's start by Made in America.
L. McIntyre

December 22 2010 at 7:32 PM Report abuse rate up rate down Reply
enpassant44

Giving the wealthy tax breaks don't make them hire or prevent them from laying off workers. Companies don't hire unless they have to. If middle class Americans had more money to spend and the workers are unable to service the increased business, that's when companies will hire.

December 18 2010 at 1:57 AM Report abuse rate up rate down Reply
mamatiger919

Instead of predicting about what may happen, let's reviewed the book about what did happen. How many jobs did the Bush's tax cut created? Albert Einstein says that Insanity is doing the same thing and expecting a different result. Tax cuts have resulted in new jobs. Therefore the tax cuts should not be extended.

December 13 2010 at 6:47 AM Report abuse +1 rate up rate down Reply
larryeart

It is preposterous that none of the government Bailout $$$ or recovery $$$ defecit spending was handed out with any regualtions that it had to CREATE JOBS. Handing $trillions in bank bailot/credit stop loss backups to the major BANKS and FANNIE & FREDDIE as well as bailouts to GM and Chrysler came without regulation/strings that the money had to create any jobs!!!??? It was USA defecti spending to bailout PRIVATE companies who are NOT going to be patriotice and create jobs out of the goodness of their hearts...and they did exactly that..Stuuf the money onto their balance sheets,and keep $$bankrolling outrageous executive $ payouts.And the USA helped these cheeseballs do just that!! EVERY government bailout/loan/recovery dollar $$spent should have been directly linked to a JOB created. The fiasco that created this financial crisis is EQUALLED by the fiasco of irresponsible governance and oversight.

December 12 2010 at 7:36 PM Report abuse +1 rate up rate down Reply
Miss Lisa Troup

The biggest pile of Horse Cocky they have thrown at us yet!!...Do they really think we are THAT STUPID?!..MUST BE!!!OBAMA is just supporting his 2% supporters...The rest of us are there to cover the tab....HORRIFIC...END THE CORPORATEOCRACY!BRING BACK DEMOCRACY!!.........O;(

December 12 2010 at 3:03 PM Report abuse +1 rate up rate down Reply
BILL

Truly Which proposal was unfunded? The Tax Cut? or The 250.00 COLA payment for Seniors and Disabled? THE TAX CUT!!!!!!! At least the COLA would come out of SS fund if they wanted it too..... the same 2% they are cutting from the SS tax. This must be the new math as I heard SS was in trouble of running out of money yet they are proposing putting less into it. If I had 100.00 and had to pay out 80.00 and then another 100.00 comes in, 80.00 out, now 100.00 less 2% in, same 80.00 out and soon paying out more than bringing in

December 12 2010 at 1:46 PM Report abuse rate up rate down Reply
Huskins Invest

I cannot wait to hear the bobbleheads spin it if it fails!

December 11 2010 at 8:05 PM Report abuse +1 rate up rate down Reply
Huskins Invest

IF the new tax package does not create the proposed number of jobs while putting the nation under a greater debt burden, will the entire congressagree to resign?

December 11 2010 at 8:04 PM Report abuse +4 rate up rate down Reply
Steven

It is funny how liberals are mad at Obama for giving up his major liberal wish list. Do liberals not realize that they got shellacked in November and American has rejected the liberal agenda. That is the fundamental problem with the Democrat party. It is not about what America wants, it is only about what they want. That is why we should go liberal hunting. They are overpopulated anyway. Best places to find liberals are; projects, welfare office, a prius, san fran and nyc, etc. HAPPY HUNTING.

December 11 2010 at 3:56 PM Report abuse -5 rate up rate down Reply
4 replies to Steven's comment
Steven

It will not create much jobs due to the fact that it has unemployment benefits for life extensions in it. That will keep the lazy from going out and getting jobs.

December 11 2010 at 3:45 PM Report abuse -5 rate up rate down Reply
1 reply to Steven's comment
sigmastef

so what your saying steve is that the more people looking for work will somehow create more jobs ?

December 12 2010 at 6:42 PM Report abuse +1 rate up rate down Reply