Wednesday, October 7, 2009

Jobs Tax Credit Making A Comeback

Unemployment reared its ugly head last month as job losses accelerated, renewing support for a job stimulus. As the fourth quarter begins, we could see many companies looking to reduce costs in order to reach fourth quarter targets. However, the idea of a tax credit for employers is gaining support and might actually work, as the following post from Economist's View explains.

Would a tax credit for businesses that create new jobs be enough to turn the employment picture around?:

Support Builds for Tax Credit to Encourage Hiring, by Catherine Rampell, Ny Times: The idea of a tax credit for companies that create new jobs, something the federal government has not tried since the 1970s, is gaining support among economists and ... has some bipartisan appeal...

One version of the approach, to be unveiled next week by the Economic Policy Institute,... would give employers a two-year tax credit if they increased the size of their work force or added significant hours of work (for example, making a part-time worker full time). ...

“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 federal government last tried this measure in 1977-78. During that period, employment — which had been soft from the 1973-75 recession — climbed at a record pace. The creation of one out of three jobs that was awarded the credit then was attributed directly to the policy. But the permanence of those jobs was less clear, and some dispute how many of those positions would have been created eventually anyway. ...

Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research who is working on the draft with John H. Bishop of Cornell, estimates that it would cost about $20,000 for each job created. ... The authors estimate their proposal could create more than two million jobs in the first year. ...

An American Economic Review study has suggested that the 1970s policy was responsible for adding about 700,000 of the 2.1 million jobs that were awarded the credit. This may sound modest, but if accurate, economists say it would make this proposal a successful and relatively cheap way of creating jobs.

Advocates argue that such incentives would be more effective this time around not only because of design, but also because of timing. In 1977, hiring was already on the upswing, whereas economists expect today’s job market to decline a bit more and then stagnate for months.

“Now is a better time than ’77 was because we’re closer to the bottom of a recession,” said Daniel S. Hamermesh, an economics professor at the University of Texas, Austin, who helped create the 1970s plan. “This could help an uptick proceed more rapidly.”

But critics of the idea argue that businesses hire based on actual demand for their products, and a minor subsidy for adding an employee will not make up for the collapse in demand across the broader economy. ...

Barack Obama ... proposed a job creation tax credit during his presidential campaign, and then in discussions for the stimulus package. The proposal was eventually killed because of concerns that employers would exploit the tax credit. For example, companies might close and reopen, claiming credit for all their “new” employees.

Even advocates acknowledge that, as with any tax incentive, employers and their accountants will take advantage of loopholes. But they argue that with strong rules ... the proposal could minimize such abuse. ...

It's worth a try, but just because both sides might agree doesn't mean it will be enough on its own to solve the employment problem. To have a chance of doing that, I think a policy like this needs to be combined with demand-side policies that create the need for more workers, the tax credit alone won't be enough. So yes, let's try this, but let's use it in addition to rather than a substitute for additional stimulus measures (which are being called other things for political reasons) that directly increase the demand for workers.

This post has been republished from Mark Thoma's blog, Economist's View.


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