Tax cuts for U.S. employers no panacea for jobs: Analysis

Firms need increased consumer demand to boost hiring

(Reuters) — It may be the only stimulus option that would get through the divided Congress, but a proposal to cut payroll taxes for United States employers would probably fall short of its aim of kick-starting the weak jobs market.

The latest idea to pull the country out of its economic morass has run into skepticism from economists and some business owners, even before it takes shape in Washington.

Cutting payroll taxes for employers could provide a small boost to growth. But most agree a temporary lowering of the rate will not convince companies to hire.

"There is no silver bullet to get people hiring," said David Rhoa, owner of Lake Michigan Mailers, a document management company in Kalamazoo, Mich.

Of course, Rhoa, like most business owners, would welcome a tax cut. But he would reinvest the savings in his firm and give some of it to his 56 employees as a small pay raise.

"Anything that they do with that money short of burying it in the backyard should be helpful (to the economy)," he said.

Without more demand from consumers, a payroll tax cut would not convince him to hire beyond the three new workers he already plans to add this year, said Rhoa.

Robert Reich, a former secretary of labour and a vocal proponent of renewed heavy government spending to spur growth, said companies are "sitting on a vast cash hoard" of more than $1.9 trillion, which shows their reticence about hiring is not due to a lack of funds.

"Businesses are reluctant to spend more and create more jobs because there aren't enough consumers out there able and willing to buy what businesses have to sell," Reich, a professor of public policy at the University of California in Berkeley, Calif., said in an email.

Differences over the effectiveness of cutting taxes to boost jobs are not new.

A tax credit under former President Jimmy Carter to stimulate new hiring in 1977 and 1978 has been lauded by some economists. John Bishop, an associate professor of human resource studies at Cornell University in Ithaca, N.Y., said it preceded a jump of more than 10 per cent in private employment.

But critics said the impact was short-lived and highly expensive to taxpayers.

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