Tax Credit for Hiring: It’s Not Even That Good of Politics

By January 29, 2010Economy, Taxation

From USA TODAY, “$5,000 tax credit for each new job a big part of Obama’s plan,” reporting on the President’s State of the Union reaffirmation of a campaign pledge, “I’m also proposing a new small business tax credit — one that will go to over one million small businesses who hire new workers or raise wages.”

There’s only one problem: Business groups say the credit won’t do much to boost hiring.

“I really don’t think it’s going to be much of an incentive,” says Bill Rys, tax counsel for the National Federation of Independent Business. “Mostly it is going to be used by businesses that would have been hiring anyway.”

The National Association of Manufacturers is promoting its own job-creation package, featuring a cut in corporate income tax rates and a more generous tax credit for research and development. The group considers those changes more important than the $5,000 tax credit.

“For those manufacturers who are looking to hire, this will help,” says spokeswoman Erin Streeter. “We don’t anticipate this tax credit being a reason for them to hire. Our members are going to hire if there is a long-term need.”

Erin is referring to the NAM’s new Milken Institute study, “Jobs for America.”

Very few people take the tax credit for hiring seriously as anything other than politics.

William Ahern of the free-market-oriented Tax Foundation writes:

Especially discouraging is the president’s decision to recycle the “job credit” idea that his own congress rejected last spring. That’s the $3,000 he wants to pay companies for each “job created,” a concept mocked by the recent, fanciful tallies of jobs “created or saved.” As even his champions are pointing out, there’s no way to tell which jobs deserve the subsidy. Firms that deferred capital spending or cut back hours during the recession to avoid firing people will get nothing during the recovery, but firms that laid all their people off first will get big checks from Uncle Sam when they start hiring again. And of course, new firms and firms that would have grown anyway will reap big rewards.

Dean Baker of the left-leaning Center for Economic and Policy Research is also critical:

Most studies show that labor demand is highly inelastic (this is why increases in the minimum wage have little effect on employment), so a tax credit that modestly decreases the cost of labor is unlikely to have much effect on employment. On the other hand, there would be many opportunities for employers to game this tax credit.

The most obvious is simply bringing some jobs on payroll that are currently contracted out. For example, if a company currently contracts out its custodial services it can instead hire people on its payroll to do this work and get the $3,000 tax credit. This would lead to no net gain in jobs.

Sen. Charles Schumer (D-NY) and Sen. Orrin Hatch (R-UT), New York Times, “A Payroll Tax Break for Jobs“:

The idea for some sort of jobs tax credit is percolating again, but the jobs credit that existed in the late 1970s was of limited success, and it was excruciatingly complicated. Recalling this experience, members of Congress from both parties have been lukewarm to such a credit, and the idea was dropped from the stimulus package last year.

A one-time tax credit to take on an additional fixed cost is a nugatory incentive in a year when the Administration and Congress are sowing economic uncertainty through the expansion of government programs, taxes and regulations — on health care and CO2 limits, just to start with.

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