10.07.2009 Policy Points

A Tax Credit for Job Hiring?

report in today’s edition of The New York Times discusses interest in adoptng a federal tax credit targeted at firms that create new jobs — an idea last tried in the 1970s. Reports the Times:

One version of the approach, to be unveiled next week by the Economic Policy Institute, a labor-oriented research organization, 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). Employers would receive a credit worth twice the first-year payroll tax for each new hire, amounting to several thousand dollars, depending on the new worker’s salary ….

Under the proposal … the credit in the first year would equal 15.3 percent of the cost of adding an employee. In the second year, it would fall to about 10.2 percent.

For example, hiring a worker might cost a small business $50,000 annually. But with the tax credit, the cost would fall to $42,350 in the first year, and then be $44,900 the next year. After that, the cost would return to $50,000.

Opinion about the utility of such a credit varies. Writes Mark Thoma of Economist’s View in qualified support:

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.

Meanwhile, Howard Gleckman of the Tax Policy Center criticizes the idea in the Times.

“Some bad ideas never go away,” said Howard Gleckman, a senior research associate at the Urban Institute. “It’s just providing incentives to lots of companies that probably aren’t going to make it in the end anyway.”

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