A $15 billion jobs-creation package may be heading to a final vote in the Senate today after gaining a measure of support from some Senate Republicans Monday. The linchpin of the bill is a provision that lifts part of the employers’ payroll tax for companies that hire unemployed workers this year, together with a $1,000 credit for keeping those employees on the books for a year.

Critics of the payroll tax deduction have claimed that it might actually slow job growth if businesses decide to lay off current workers and hire the unemployed (see, for example, this post at futureofcapitalism.com).

The Congressional Budget Office doesn’t agree.

In a paper released today, the CBO asserts that payroll tax relief is among the policies that offer the largest employment bang for the budgetary buck.

Companies could respond to the tax break in four ways, says the CBO. They could:

• Reduce the price of their products. This would lead to increased output, boosting hours worked and hiring.

• Pass on the tax savings to employees as higher compensation.

• Retain the savings as profits. This should raise profits and share price, and the resulting higher household wealth might increase consumption.

• Increase hiring. Some companies would “use slightly more labor during a period when it was temporarily less expensive,” the report notes.

Even though the direct impact on hiring would likely be small, the overall effect of the tax break would be to boost output over five years by between $0.40 and $1.20 per dollar of lost government revenue. And that would give a much bigger and more immediate boost to employment than could be achieved by measures such as investing in infrastructure or reducing income tax, which would take a year to kick in. ###