The voices of Tax Policy Center's researchers and staff
To the surprise of nobody, President Obama has proposed new tax subsidies for businesses that hire additional workers by the end of the year. Structured as a payroll tax holiday, the plan would give companies a $5,000 credit against their share of Social Security payroll taxes for each net new hire, plus a “bonus” 6.2 percent credit for real increases in overall wages. Because the subsidy would be capped at $500,000, small business would be the big winner.
Think of this as a jobs version of cash for clunkers or the homebuyers’ credit. The explicit goal is to get employers to accelerate hiring into this year. An optimist would see this as a plan to jumpstart hiring and accelerate the virtuous demand cycle that usually kicks a sluggish economy into gear (the more people who go to work, the more likely they’ll buy stuff, and the more people companies will hire to make the stuff these new consumers want to buy). On the other hand, a cynic might say it is an effort to bail out terrified Democrats by paying companies to hire new workers before the November elections. It might even help Democrats take credit for hiring that was going to happen anyway. A jobs bill, true, but not quite what most of us have in mind.
This proposal would cost between $30 billion and $35 billion for this year alone. The White House won’t say publicly how many new jobs it expects to create, but administration officials expect a minimum of 600,000.
The problem with subsidies such as this is that they are exceedingly sloppy. A lot of money goes to those firms that would have hired anyway. This, in fact, was the experience with the homebuyers’ credit. It set off a flurry of new home sales last fall as buyers rushed to beat the deadline for getting the subsidy (Congress eventually extended it, but that's another story). Once the tax-generated boomlet ended, the market fell off the table in December.
The timing of today’s credit is very different than last winter when Obama proposed a different jobs tax incentive while the U.S. was in the depths of the recession. I was very skeptical then, in part because it was hard to imagine many firms hiring even with a tax holiday. Now, with the economy recovering (GDP grew by 5.7 percent in the fourth quarter of 2009), it is much more likely companies will take advantage of the credit. That’s the good news. It’s also the bad news, since more will also take the credit for doing what they would have done anyway.
To its, um, credit, the White House seems to have carefully designed this version. It set reasonable anti-abuse rules (one can think of all sorts of ways unscrupulous firms could game this subsidy). On the other hand, it is trying to keep the credit simple, so it doesn’t discourage companies from participating.
Also, the last time Congres tried this in 1977-78, it turned out that relatively few businesses knew about the credit, but it should be much easier for Obama to get the word out. That too will create more both more gross hires and more free money.
CBO recently gave this design a good grade for boosting growth and employment. It concluded that a plan like this would increase GDP by somewhere between 40 cents and $1.30 for every dollar of budgetary cost. That’s not as good as increasing aid to the unemployed, but is comparable to boosting infrastructure spending. Creating new subsidies to jolt the labor market may not be great tax policy. But, if you are a Democratic office holder fixated on the top-line unemployment number, it might be the best option out there for some much desired personal security.
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