BUSINESS
11/05/2010 09:17 am ET | Updated May 25, 2011

Job-Creation Idea No. 14: A Tax Cut Even Democrats Love

(No. 14 in Huffington Post's America Needs Jobs series.)

WASHINGTON -- The only thing Republican congressional leaders seem to be in the mood for is cutting taxes, so in honor of the GOP takeover of the House, today's "America Needs Jobs" idea is a tax credit -- for new jobs.

In theory, the idea is a win-win. What better way to stimulate the economy and create new jobs than allow employers to take money they would otherwise have paid in taxes and use it to hire someone new?

It has the same bang for the buck as if the government started hiring people directly, but leaves the allocating and prioritizing to the free market. And it's fast.

It's also essentially a smaller, targeted version of the payroll tax holiday idea that was described in the first of this series of articles.

President Obama laid out his one-year, $33 billion "jobs and wages tax cut" proposal back in January. It would give all businesses a $5,000 credit to be applied against payroll taxes for each net new employee. The total amount of the credit would be capped at $500,000 per firm. In addition to that, small businesses would get a tax credit equal to their share of payroll taxes on any other increases to their payroll, including higher wages or expanded hours.

The Economic Policy Institute (EPI) has long been championing a similar plan. Theirs would provide employers with a credit equal to 15% of the net increase in their payroll (not including any salaries above $106,800).

There are, however, some problems with the idea.

For one, a tax credit is yet another approach that gooses the supply side of the economy when the problem is primarily one of demand. There's no point in widget makers hiring another employee, even if it's cheap for them to do so, if they can't sell the widgets they're already making.

It's true that If it functioned properly, a tax credit for job creation would put more money in workers' pockets and thereby increase demand -- but that's sort of the chicken to the tax credit's egg.

There are also practical concerns.

How do you tell if employers applying for credits are really creating new jobs, rather than, say, just engaging in normal hiring churn? And what about if they started gaming the system, for instance by bringing contracted labor onto the payroll? Neither of those actually increases employment.

And then there's the matter of giving employers tax credits not just for new jobs but for expanded hours. As Dean Baker, the co-director of the Center for Economic and Policy Research, pointed out after Obama made his proposal public, encouraging employers to add more hours "would give companies an incentive to hire fewer workers" -- not more.

Baker is a champion of work-sharing ("America Needs Jobs" idea no. 6), which is essentially the exact opposite idea. To promote work-sharing, the government would create financial incentives for employers to reduce individual employees' hours when business is bad, rather than lay people off. By the same logic, the government should be discouraging businesses from giving existing employees longer hours -- and instead encouraging them to hire new people.

As it happens, an even smaller and even more targeted tax credit for hiring already exists, and has been in force since mid-March, when it was signed into law. The Hiring Incentives to Restore Employment Act, or HIRE, rewards employers for hiring new workers who had been unemployed for eight weeks or longer. The law exempts employers from payroll taxes on those hires, and gives them a $1,000 credit for each worker they retain for 52 weeks.

According to the Department of Treasury, by the end of August, businesses had hired 8.1 million new workers who had been unemployed for eight weeks or longer. But that program is set to expire at the end of December.

Despite all their problem, tax credits for new jobs do have a lot going for them.

A January 2010 study from the Congressional Budget Office ranked them as one of the most effective ways of stimulating the economy.

Labor market experts Timothy J. Bartik and John H. Bishop summed up the advantages in an EPI briefing paper last October:

Besides having broad-based, bipartisan political support, the best argument for a job creation tax credit is simply that it will create almost 3 million jobs in [the first year] and over 2 million in [the second]. Moreover, it will stimulate the entrepreneurial character of Americans by giving 6.5 million employers and millions more aspiring entrepreneurs a limited-time offer to expand their production or start new endeavors, at a discount. Because choices about whom to hire and what work they should do are left to independent decision makers who can act immediately, the credit will have just as quick an impact.

And although Bartik and Bishop accept that more than 80 percent of the tax credit would go to companies that would have added workers anyway, they insist the jobs that are actually created would still be a relative bargain:

[T]he cost would be between $4,700 and $26,300 per net new job created in the first year. This compares favorably to other means of generating jobs and is certainly more favorable than other business tax breaks, which typically have a low "bang-for-the buck" in terms of job creation.

And perhaps most importantly, the idea polls well. According to a 2009 Hart Research survey, it is the most popular of the major job-creation measures being discussed, with a whopping 87 percent of the public favoring the idea, and more than half -- 56 percent -- "strongly" favoring it.

COMING NEXT IN THE AMERICA NEEDS JOBS SERIES: Wanted: One Industrial Policy

Have you missed any of the previous installments of HuffPost's America Needs Jobs series? Read the introduction, Idea No. 1: A Payroll Tax Holiday, No. 2: Rescue The States, No. 3: The Joys Of Retrofitting, No. 4: Put Young People To Work, No. 5: Gearing Up For Climate Change, No. 6: Sharing The Pain Of Layoffs, No. 7: Drawing A Line With China, No. 8: Time For A New WPA, No. 9: Encourage Banks To Lend -- Or Else, No. 10: A Lower Dollar Would Level The Playing Field, No. 11: Buy American -- If You Can, No. 12: Let The Old Folks Retire Early And Make Way For Young Workers. and No. 13: No Better Time Than Now To Build The Future.

Got an idea you think we may be overlooking? Email froomkin@huffingtonpost.com.

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Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.