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Four Pinocchios: small business tax cut will ‘create 100,000 jobs a year’ (Part 2 on claims about the bill)

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Alex Wong, Getty Images

“According to a study, the small business tax cut act will help create more than 100,000 new jobs a year once fully in place.”

“Mr. Speaker, while we continue to work toward tax reform that broadens the base, brings down the rates for everybody, and gets rid of loopholes, Washington assumes the role of picking winners and losers. We need to take incremental steps to give job creators tax relief right away. This Small Business Tax Cut Act is a step in that right direction.”

— House Majority Leader Eric Cantor (R-Va.), arguing in support of the Small Business Tax Cut Act during a House floor debate, April 19, 2012

In a previous column, we awarded three Pinocchios to Rep. Xavier Becerra (D-Calif.) for saying that the “rich and famous” would receive the lion’s share of the savings from the Small Business Tax Cut Act, which would reduce taxes by 20 percent for firms with fewer than 500 employees. Now it’s time to take a look at a claim from Rep. Cantor, who sponsored the bill.

From the way Cantor described it, this policy would provide a boost to jobs numbers every year. Let’s examine that claim in detail.

(Readers can listen to this mp3 from C-SPAN Radio to hear Cantor’s comments, which begin at about the 3:30 mark.)

The Facts

We’re always suspicious when someone cites “a study” without providing attribution. Cantor’s office backed up the congressman’s claim by pointing to an analysis by Fiscal Associates, the same group that analyzed former GOP presidential candidate Herman Cain’s “999” tax proposal and said it would be revenue-neutral.

Fiscal Associates is a two-person operation consisting of former Treasury Department tax expert Gary Robbins and his wife.

The tax-cut report was commissioned by the YG Network, a political advocacy group that champions policies nearly identical to those of the so-called “Young Guns,” a handful of rising Republican lawmakers including Cantor, House Budget Committee Chairman Paul Ryan (R-Wis.) and House Majority Whip Kevin McCarthy (R-Calif.).

It’s worth noting that Congress’s non-partisan Joint Committee on Taxation analyzed the legislation and concluded that “the effects of the bill on economic activity are so small as to be incalculable within the context of a model of the aggregate economy.” In other words, the economic impacts would be too small to measure.

Cantor said the tax-cut bill would “help create more than 100,000 new jobs a year once fully in place.” This line appears almost verbatim in the report from Fiscal Associates. The sixth bullet point in the summary reads as follows: “

“Once fully implemented, over time the 20% small business tax cut will create more than an average of 100,000 jobs per year.”

We asked Robbins about that sentence, and he said he didn’t write it. That surprised us, because the analysis is entirely attributed to him.

YG Network senior adviser Brad Dayspring, a former top aide to Cantor, clarified that he had suggested the line, and that Robbins said it would make sense. Here’s the e-mail exchange:

Dayspring: Am I reading this correctly: Can we say that it creates 39K in year one, but once fully implemented over time it creates an average of 100K jobs per year.
Robbins: You have it right.

Dayspring declined to say who copied and pasted the sentence into the executive summary.

Let’s review. Cantor cited a line that was apparently inserted into the report from a political advocacy group that supports him, and for which his former aide is a senior adviser. That was around the same time the nonpartisan Joint Committee on Taxation determined that the economic impact of the tax cut would be too insignificant to measure. Nevertheless, a spokeswoman for Cantor says his staff only learned about the study after they read about it in Politico.

Putting this aside, let’s examine Cantor’s quote. The congressman said his proposed tax cut “will help create more than 100,000 new jobs a year once fully in place.” We think that most ordinary listeners would think Cantor is saying the bill would create an average of 100,000 jobs per year, although Cantor’s staff disputes this interpretation. We’ll address that later.

The first problem with Cantor’s statement is that the existing bill only provides for a one-year tax cut. Table 2 of the Fiscal Associates report shows that the impact after one year would be just 39,000 new jobs. According to the Joint Tax Committee, that increase in employment would come at a cost of $40 billion to the federal Treasury, .

A Cantor spokeswoman told us that the congressman was referring to the long-term impact of the proposed tax cut, in the event that Congress decided to extend it one day. Cantor’s spokeswoman said this should have been obvious when he mentioned “fully implemented,” although that phrase could just as easily mean “once the one-year bill has run its one-year course.”

Cantor did indeed talk about the need for long-term tax reform during his remarks on the floor, but he referred specifically to his bill and not to long-term policy when he mentioned the 100,000 jobs number.

Talking with the author of the report only added to the confusion. Robbins had this to say about the line that was inserted into the executive summary: “I would not have put that in there...because I wanted them to know that temporary changes wouldn’t raise employment like that.” Yet he also said that Cantor’s statement could be correct depending on the the way one looks at the numbers.

To clear things up, we asked Robbins to simply send a breakdown of how many jobs he projected each year for a permanent 20-percent small-business tax cut. Here are the numbers he provided:

Year One: 49,000 new jobs

Year Two: 27,000 new jobs

Year Three: 27,000 new jobs

Year Four: 32,000 new jobs

Year Five: 32,000 new jobs

Year Six: 11,000 new jobs

Year Seven: 11,000 new jobs

Total jobs added over seven years: 189,000

Average for years one through seven: 27,000 new jobs per year

(Note: the report says 39,000 jobs in the first year but Robbins gave the figure of 49,000 when providing this breakdown.)

These numbers suggested that Cantor’s claim was well off the mark, but his spokeswoman argued that we’re once again misinterpreting the congressman’s comments. She said the quote was meant to suggest this: The policy, once fully implemented, would result in the average number of jobs beyond the baseline each year exceeding 100,000.

How was that figured? Cantor added up the total number of new jobs that supposedly would have been added by the end of each year — since the start of the tax cut — and then divided by the number of years. This is how his calculation worked:

Year One: 49,000

Year Two: 76,000

Year Three: 103,000

Year Four: 135,000

Year Five: 167,000

Year Six: 177,000

Year Seven: 189,000

Total jobs added over seven years: 189,000

Average above baseline for years one through seven: 128,000 jobs a year

Cantor’s staff is essentially arguing that the economy would march forward every year with the average power of at least 100,000 additional jobs under its belt once the tax cut has been in place for five years, assuming you believed the results of this study commissioned by Cantor’s allies. But none of the economists we talked to interpreted his remarks that way.

“The clearer way to say it is that this [policy] would add 188,000 jobs, and that’s it,” said Mark Zandi, chief economist for Moody Analytics and an adviser for both Democrats and Republicans.

Zandi’s take on the numbers doesn’t sound nearly as impressive as Cantor’s assertion that the tax cut would “help create more than 100,000 new jobs a year once fully in place,” especially when you consider that the policy would put a dent of at least $40 billion in the federal budget every year.

For good measure, we asked Zandi — who is known for his predictions of how many jobs would be created by various tax and spending policies — whether he had the same read as Cantor on the Fiscal Associates report. Would the tax cut help create 100,000 jobs per year at the seven-year mark?

“That’s not what it’s doing,” Zandi said. “It’s actually creating 27,000 jobs per year.”

Indeed, that sort of average appears relatively common in analyses of the impact of tax cuts. Allen Sinai, noted for his economic models, once examined the impact of a capital gains tax cut on the economy. His report, on page 26, states clearly that the average number of jobs created per year was similar to way Zandi expressed it, not Cantor.

Beyond any issues with the clarity of Cantor’s message, the congressman’s phrasing still doesn’t support the notion that the tax cut “will help create 100,000 new jobs a year.” The bottom line is that this policy wouldn’t come close to producing that many new jobs in a single year. Not ever, no matter how long you implement it. And that’s according to the study that Cantor used.

In fact, the Fiscal Associates report says that the change in jobs after 10 years would be 194,000 (see page 2). Cantor would have been on much safer ground using that figure, but instead he chose to use a number derived from a formula that would make little sense to the average listener.

The Pinocchio Test

We struggled with whether this was worth Three or Four Pinocchios, which is reserved for whoppers. So here’s our reasoning.

Cantor quoted almost verbatim from a line that one of his former aides asked to insert into an outside analysis commissioned by a group that backs Cantor’s policies. The sequence of events here seems awfully strange.

So Cantor already loses points for relying on a study ginned up by his political allies, rather than the more sober analysis provided by the official tax score-keeper of Congress.

We also evaluate claims based on how an average listener would interpret them. We are not going to quibble with Cantor’s methodology, except to note that when we read his statement to economists, they thought he was saying something different from what his staff claimed he said.

For most people we consulted, Cantor’s remarks suggested that his proposed tax cut would produce 100,000 jobs per year. The one-year reduction in taxes would do no such thing. The report from Fiscal Associates shows that it would produce only 39,000 jobs without an extension.

As Zandi said, the clearer thing to say is that the tax cut, if made permanent, would produce a total of 188,000 jobs in seven years, period.

All those things, combined, tipped the scales toward Four Pinocchios.

Four Pinocchios

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