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So far, two tax plans aimed at boosting hiring this year are on the table: one from President Obama and another from senators Chuck Schumer (D-N.Y.) and Orrin Hatch (R-UT). Which would do a better job at increasing employment? I’m betting on Obama’s.
As readers of TaxVox know, I am skeptical about any tax incentive targeted at job creation. If government is going to enact more stimulus, I’d rather it be aimed at increasing overall demand for goods and services, and not at hiring workers. My biggest concern: Most of the benefit--as much as 85 percent or more-- of even the best-designed jobs credit will inevitably end up in the hands of companies that were going to hire anyway.
Still, there is a good chance Congress will pass some version of a jobs tax credit this year. So which model is better? I think the Obama plan wins, hands down. If a credit is going to have any chance of boosting jobs, it needs to be generous enough to matter to employers, easy to understand, and not filled with all sorts of constraints on who gets hired. At the same time, if it is not going to become an utter boondoggle, it also needs to prevent the inevitable gaming that comes with such subsidies. The Obama plan is better on all counts.
This is how the two plans would work:
Obama would give businesses a $5,000 tax credit for every net new employee they hire in 2010, and an additional credit against the employer’s 6.2 percent share of the Social Security payroll tax for increasing their payroll (whether from hiring new workers, expanding hours of current employees, or raising wages). He'd also prevent employers from gaming the system by replacing high-wage workers with more low-wage employees or adding new workers while reducing total payroll. The subsidy would be aimed mostly at small businesses, and the White House figures the total cost would be about $33 billion.
Schumer-Hatch, by contrast, only exempts employers from their share of the payroll tax. Firms eventually get another $1,000 for new hires they keep on for a year. They can claim the subsidy for every new worker they hire, regardless of whether it results in a net increase in jobs. But they’d only be eligible if their new employee has been out of work for at least 60 days. This proposal would cost about $13 billion, according to the Senate Finance Committee.
These differences are critical. Because the Schumer-Hatch subsidy is so small, it is hard to imagine many employers would hire workers they otherwise would not have taken on. Worse, by limiting the benefit to new hires who have been unemployed for two months, this version creates exactly the kind of paperwork headache that businesses hate. Besides, if the goal is to increase employment, why is it better to hire someone who has been out of work for 60 days instead of, say, 59?
If you don’t believe me, ask Tim Bartik. He is a huge fan of a jobs credit, and has extensively researched Jimmy Carter's 1970s version of this subsidy. Tim figures the Obama credit could result in more than one million new jobs, while Schumer-Hatch would generate only one-fifth as many. My guess is that Tim’s estimates may be high for both, since recession-ravaged employers may be less likely to hire this year, even with the new subsidy, than they would in a healthier economy. Still, I think Tim’s basic analysis is spot on: The Obama plan is likely to create many times more jobs than the Senate version.
I remain a skeptic about this whole enterprise. As one lobbyist told me the other day, “My members are not in business to hire people. They are in business to sell things, and they’ll hire only if they have more orders than their workers can fill.” That describes, more clearly than I ever could, why any credit gets such a small bang for the buck.
But if Congress insists on plowing ahead, it may as well do so in the most effective way possible. And that is the Obama version.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.