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Where Credit is Due: Tax Breaks to Spur Hiring?

Michelle Chen

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After doling out stimulus dollars, shoring up state agencies and setting up construction jobs, Washington is still looking at epidemic levels of unemployment, even as analysts suggest recovery is around the corner. So what else can the government do to put people back to work?

It might not be the most elegant political move, but some progressive economists think it’s time for the government to give companies tax breaks for hiring workers. The Economic Policy Institute proposes a job creation tax credit for employers, which would cover 15 percent of the cost of paying new wages in 2010, followed by 10 percent in 2011. The credit would apply broadly across all job sectors — private, government and nonprofit firms.

EPI economists Timothy Bartik and John Bishop project that for a relatively modest public investment, the credit could create 5.1 million additional jobs in the U.S. economy over these two years.”

EPI argues that the credit, which could apply to both new hires and pay raises for current workers, would shave down overhead labor costs — in turn making American-made goods more affordable in the global market, reducing reliance on imports, and discouraging the offshoring of jobs.

Bartik and Bishop conclude that the policy requires a relatively modest public investment, and its effectiveness stems from its straightforward design: businesses only get the credit if they increase their payrolls, either through adding jobs, adding hours, or raising wages.”

This isn’t a novel idea. The government established a job creation tax credit in the late 1970s, which coincided with a rise in employment.

An extra five million jobs would certainly help the battered economy. But would the benefits be sustainable? And what if the government ends up subsidizing expansion of companies which were going to hire people anyway, even without the bonus?

The Atlantics Derek Thompson, who compares the tax credit concept with a similar proposal for a payroll tax holiday,” sees some possible loopholes:

Employers might try to finagle tax credits for hires they’ve already made, or were poised to make anyway. Some are concerned that firms might fire workers before the start date of the credit and hire them back when the credit kicks in, which would effectively mean the government’s just handing out money to the companies.

State governments have also used various tax schemes to foster development. But Good Jobs First points out that corporate tax subsidies have become notorious for encouraging Big Box-oriented growth” with minimal accountability, which could ultimately hurt local economies.

The New York Times’ Catherine Rampell says a job creation credit should be timed in anticipation of a rebound, as employers may be willing to bet on the risk that demand for their goods will finally turn around soon.” But absent a clear bounce in demand, the credit would probably not be enough to really boost hiring.

Dean Baker at the Center for Economic and Policy Research advocates a tax credit focused on preserving jobs (rather than inducing hiring). Companies would share” work across the labor force by reducing hours for individual workers, which would ideally stave off layoffs. Baker says that under this model, If employers of 60 million workers reduced work hours by an average of 5 percent, then it should lead to the creation of 3 million new jobs – before taking into account any multiplier effect.” Small businesses with tighter financial margins could apply the credit toward paid leave.

All these ideas could soften the blow of the recession, but they hinge on a certain degree of buy-in from companies. In the aftermath of Bush-era tax slashing and the Wall Street bailout mess, workers have good reason to be skeptical of government attempts to engineer corporate behavior.

That’s one reason why advocates see job creation tax incentives as a complement to other major federal initiatives such as infrastructure investments, in which government has a more direct hand in expanding job opportunities.

Still, in the private sector, as families continue to struggle with joblessness, sooner or later something’s gotta give. After years of bending over backwards to cushion corporations, lawmakers may finally try to design tax policies that push employers to bend toward the public will.

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Michelle Chen is a contributing writer at In These Times and The Nation, a contributing editor at Dissent and a co-producer of the Belabored” podcast. She studies history at the CUNY Graduate Center. She tweets at @meeshellchen.

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