Marketplace Scratch Pad

Money for nothin’?

Scott Jagow Oct 27, 2009

One idea being bounced around Congress is a tax credit to businesses for creating jobs. We need something to get the job market going again. I’m just not sure this particular tax break is the solution.

Here are the arguments for and against. From the New York Times:

“It’s beautiful if it can be timed at a dire moment like this, when unemployment is way too high and appears to be going somewhat higher,” said Mr. Phelps, an economics professor at Columbia, lamenting that the president dropped it from the $787 billion stimulus plan approved in February. “But it’s a pity that this wasn’t done a year ago.”

The Economix blog suggests a case where the tax credit might work:

… suppose a company estimates that a new worker could bring in about $48,000 in revenues every year. But the cost of hiring that new worker would be about $50,000 a year. From the company’s perspective, it wouldn’t make sense to take on the hire (here, $48,000 additional revenues – $50,000 additional costs of hire = $2,000 net cost). With a 15 percent tax credit, though, the cost of hiring a new worker might fall to $42,500. That means, all in all, the company would likely come out ahead if it hired the worker (here, $48,000 additional revenues – $42,500 additional costs = $5,500 net gain).

But NPR gives some counterarguments:

Some worry that a new-jobs tax credit would end up being just another waste of government money. Employers would get tax money for hires they would have made anyway. Or they might try to game the system by laying off more workers now, and hiring them later just to get the tax break.

Economix points to a situation this very month in North Carolina. Dell decided to close its Winston-Salem plant and cut 905 jobs. Five years ago, North Carolina gave Dell $242 million in tax breaks, which were tied to “employment milestones.” Apparently, they didn’t count too heavily in the business decision to close and fire everyone.

These kinds of government incentives still smack of top down motivation instead of bottom
up. The Big Picture blog advocates a payroll tax holiday:

This stops the government from taking approximately $20 billion a week from people working for a living (a total of $600 per month for someone making $50,000 per year) rather than using that $20 billion to keep some bank limping along. The Government would still continue to credit the social security and the Medicare accounts, so employees and employers will never have to pay back the monies they received. The Payroll Tax Holiday would restore income to American workers (and businesses) to help make their loan payments, rents, pay bills, and sustain their households.

What do you think? Something like that? Or do you think a tax credit would encourage businesses to hire?

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