We’re likely to see a tax credit for new hires as part of whatever first-installment job creation measure Congress finally agrees on. But, as Timothy Bartik, an economist at the W.E. Upjohn Institute, explains “not all job creation taxes are created equal.”
What we want, of course, is to encourage employers to expand their payrolls–bring some of those jobless workers on board, put some workers whose hours were cut back into full-time positions, raise wages for those who’ve been struggling to make ends meet with, at best, what they made before the recession set in.
Now, no employer is going to bring on new workers just because of a tax credit. In fact, the National Federation of Independent Businesses, the main small business association, has said that new-hire credits won’t do much until consumer demand increases.
But say an employer was thinking about new hires. A meaningful tax credit that kicked in soon could persuade that employer to go ahead now.
The problem is that it could be easy to game the system–just fire someone and hire someone else instead. Or convert a full-time job to two part-time jobs and hire a new worker for one of them–or both if the screwed-over worker quits.
Another problem is that turnover in some types of businesses is always high–well over 100% in major fast food restaurants. We don’t want our taxpayer dollars going to employers that are just coping with routine churning.
President Obama proposed a $5,000 tax credit for every net new employee a business hires, capped to prevent very large rewards to large, expanding businesses. Note how that net increase requirement deters both gaming the system and rewards to employers who are merely replacing departed workers. The tax credit would be payable on a quarterly basis. So funds would start flowing to the employer soon after each hire.
The President’s plan would also reimburse small businesses for inflation-adjusted increases in their Social Security payroll taxes. This would provide incentives not only for new hires, but also for increased hours and/or wages.
Senators Charles Schumer (D-NY) and Orrin Hatch (R-UT) came up with an alternative bipartisan measure. It would waive an employer’s 2010 share of Social Security taxes for new hires who’ve been unemployed at least 60 days. They say this approach would encourage employers to hire soon, since the amount they’d save would dwindle as the year goes on. They’d also provide a $1,000 tax credit for each eligible employee still on board in 2011.
Bartik says that limiting the tax credit to employees who’ve been unemployed for a specified time and the employer’s Social Security share to only one year will limit the impact. Ditto for deferring the little hiring bonus to 2011.
He and a colleague estimate that the Schumer-Hatch plan would create no more than 200,000 jobs. At an estimated cost of $13 billion, each of these jobs would cost $65,000–probably more than most of the jobs would pay. Dean Baker, Co-Director of the Center for Economic and Policy Research, calls the plan “money for nothing.” Other economists have chimed in on a similar note.
By contrast, the Congressional Budget Office recently identified a tax cut along the lines of the President’s proposal as the most effective option for increasing employment. The Economic Policy Institute estimates that it would create about 1.1 million jobs, at a cost of about $30,000 each.
Nevertheless, Senate Majority Leader Harry Reid decided to include the Schumer-Hatch version in the pared-down jobs bill he managed to get the votes for. Odds are the House will pass it as-is.
Seems that these days a bipartisan proposal is likely to trump a better one.