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Reality could bury Obama’s tax credit fantasy

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January 26, 2010

President Barack Obama’s push to create jobs includes a new tax credit for small businesses that add employees, an idea that has appeal as the nation struggles with an unemployment rate topping 10 percent.

It is an idea, however, that fell flat in Congress when Obama first proposed it last year because lawmakers didn’t know how to target the credit effectively. The Obama administration still hasn’t provided details on how the tax credit would work, and some tax experts question whether it would.

“It’s very hard to know when a company is incrementally adding jobs because of a tax credit, and when they would have done it anyway,” said Eugene Steuerle, a Treasury Department official in the Reagan administration who is now co-director of the Tax Policy Center, a Washington think tank. “I’m sympathetic to subsidizing low-wage jobs. It’s just a question of how you design it.”

Congressional researchers say a tax credit for firms that increase payroll could be a good way to increase employment, if the credit is available to all companies, not just small businesses. They cautioned, however, that it would be difficult to administer.

Among the issues raised by tax experts:

  • How would the government prevent abuse by companies that artificially increase payroll?
  • How would new companies be treated?
  • How would a firm be prevented from disbanding and reopening under another name just to claim the credit?
  • How would the government ensure firms add long-term employees when the credit is only for a year or two?
  • Would firms be willing to add workers to get a tax credit when consumer demand for their products has not increased?

Clint Stretch, a tax policy expert at Deloitte Tax, said the tax break would help companies that shed jobs last year and were ready to start rehiring this year.

“Guys who were ruthless and threw people out on the street will benefit while those who kept their workers will not,” Stretch said.

The Obama administration renewed its focus on job creation last week and the president called on Congress to pass a jobs bill that provides “tax breaks to small businesses for hiring people.”

Obama first proposed the tax credit late last year, but House Democrats didn’t include it in a jobs bill they passed in December. The bill is awaiting action in the Senate. Aides said Obama will focus on job creation in his State of the Union address Wednesday.

The nonpartisan Congressional Budget Office recently analyzed several proposals to create jobs and improve the economy, and concluded that a payroll tax credit for firms that increase payroll would be among the most effective. However, the analysis said limiting the credit to small businesses would reduce the economic benefits.

Congress enacted a similar tax credit in the 1970s and few small businesses took advantage, the CBO report said.

Two economists have been promoting a job creation tax credit for the past several months: John H. Bishop, a professor at Cornell University, and Timothy J. Bartik, senior economist at the W. E. Upjohn Institute for Employment Research in Michigan.

Under their proposal, businesses that increase their payrolls by more than 3 percent over 2009 levels would get tax credits worth 15 percent of the increase. The tax credit would only apply to the first $50,000 of a worker’s salary, capping the amount at $7,500 per worker.

Big and small employers would be eligible, and the credit would be available for existing workers who get raises or more hours, as long as payroll is increased for employees making less than $50,000. The tax credits would be refundable, meaning employers would get them as payments, even if they don’t owe any taxes.

Bishop said companies that hire workers, increase hours or increase wages would all be helping the economy.

“We’re trying to find a way to lower the cost of adding labor,” Bishop said. “The job creation tax credit has the highest bang for buck.”

10 Responses to Reality could bury Obama’s tax credit fantasy

  1. griff

    January 26, 2010 at 9:37 am

    I’m all for lower taxes, but I don’t think this one will deliver on it’s stated goal of creating jobs.

    Perhaps a middle class tax cut would be more appropriate. Having more money to spend would mean more demand for goods. More demand for goods means more production. More production would mean more workers would be needed to produce those goods.

    Then maybe a tax cut for small businesses would keep this going.

  2. bryan mcclellan

    January 26, 2010 at 5:15 pm

    Might I add higher tariffs and stiff penalty’s for inferior and dangerous imports Griff ?

    Our small manufacturing base has to be brought back to our shores and for what it’s worth, I feel this is the real starting point sans tax breaks for medium to large corporations, and especially the insurance cabal that rarely pays off without a fight the common man cannot win.

    I also agree without the perhaps, that the weight has to be put on the few with all the horses and not we, who are on foot.

  3. griff

    January 26, 2010 at 7:20 pm

    You sure can, but how about for superior and safe imports as well?

  4. bryan mcclellan

    January 26, 2010 at 8:01 pm

    Level the playing field for American workers and I’m all for it. Leaving future generations to serve instead of build putting them thus beyond out of the loop of innovation is unacceptable.

    I do a one hour dissertation on the singular pride one can redeem from digging the perfect hole with a dull shovel. You would not believe the looks I get in the beginning nor the nods of understanding when I finish.

    I personally want to wear my nation literally on my sleeve. “Made in America”.

    We used to do it best. Now that we have shown the world how, it’s time to put our focus back to training and delivering a future for our children without the wholesale abandoning of our enterprising and inventive background.

  5. griff

    January 26, 2010 at 11:35 pm

    I’d like to hear that. Or at least read a transcription. I’ll go dull my shovel now.

  6. woody188

    January 26, 2010 at 8:48 pm

    One might think that sending home the millions of VISA holding foreign workers might create a job here and there. Not to mention over 13 million illegal foreigners. Jobs created to remove them. Jobs left behind include many thousands of high paying technical and engineering work. I’d say that would put our unemployment back in the 6% range within a year or less.

  7. almandine

    January 26, 2010 at 9:20 pm

    The problem, of course, is that should they send them home there wouldn’t be those millions of “beholden” voters to count on, and let’s face it… when the goal is to get firmly entrenched politically, you’ve gotta have a solid majority to count on. Who better than foreigners chasing the dream?

  8. bryan mcclellan

    January 26, 2010 at 10:35 pm

    Who better indeed.
    Zero HB-12345 visas.
    How can our kids survive left with only HB-678 when 12345 are already taken ?

  9. griff

    January 26, 2010 at 11:43 pm

    Your comment reminds me of an interesting thing that happened in the 2006 midterms in California.

    As most of us know, the Democrat party are expert panderers to the Hispanic/immigrant communities. In ’06 in California there was a ballot initiative to legalize gay marriage. But lo and behold, who came out in force to block its passage? That’s right – the Hispanic community.

    It seems the Democrats hadn’t taken into account that their strong mostly Catholic beliefs would come before party loyalty. That, or they don’t really understand or care about these people other than as a vote-getting machine.

  10. almandine

    January 27, 2010 at 8:20 am

    “It seems the Democrats hadn’t taken into account that their strong mostly Catholic beliefs would come before party loyalty. That, or they don’t really understand or care about these people other than as a vote-getting machine.”

    You’re correct on both counts.