Tax Credits For New Jobs
Is tax credits for new jobs good policy? Do credits work? Are there better options?
More than one Illinois politician is mulling the idea of creating a state tax credit for new jobs. Basic storyline: create a job, get a $2,000 tax credit.
Good idea? The Heritage Foundation took at look at a recent federal job tax credit proposal, and while the mechanics are slightly different, the same concepts are in play. Their take:
Hiring Tax Credits Marginally Effective
Although the first major provision in Senator Reid’s proposal appears to encourage job creation, it will ultimately fail to do so. The bill would suspend the 6.2 percent employer payroll tax on newly hired workers in 2010. Companies that keep these workers on their payrolls for at least one year would receive another $1,000 credit against their 2011 taxes. This proposal, however, would create few new jobs.
Jobs come from the creation of valuable goods and services by entrepreneurs. Companies hire when the additional earnings that a new worker creates by producing those goods and services exceed the cost of employing that worker. The payroll tax suspension would slightly lower the cost of hiring workers. As a result, it would probably cause some companies to hire workers they otherwise would not have.
However, suspending the payroll tax for one year would not create better opportunities to produce valuable goods and services; nor would it increase the earnings a new worker would create for his or her company. Simply reducing the cost of a potential job will not cause an actual job to emerge if consumers fail to signal that such a job should exist. As a result, most companies would not expand and hire permanent new workers.
Instead, most of the tax suspension benefits would be claimed by companies that already planned to hire new workers. Even in this recession firms are hiring new workers: 49.4 million workers were hired for new jobs in 2009. Suspending the payroll tax would cost billions of dollars, most of which was spent rewarding employers that would have hired new workers anyway. Indeed, when Congress passed a similar tax credit in the 1970s, that legislation created relatively few new jobs. Why? Because the employers who hired new employees would have done so with or without a credit.
Even if the payroll tax suspension created the jobs, these gains would be offset by a similar number of job losses. The tax revenue foregone due to the payroll tax suspension will require an increase in federal borrowing by the same amount; borrowing that deprives the private sector of capital to use as it sees fit, whether for business investment or personal consumption. Thus, the primary effects of this tax are to reduce labor costs for certain employers and reduce the funds available to others.