What Kind of Tax Relief Would Create the Most Jobs?

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As Congress wrangles over a jobs bill in the next week, the central debate is: What kind of tax cut will stimulate the most growth? The White House has gotten behind a "hiring tax credit" that would give an employer $5000 for each worker added this year. In contrast, a bipartisan plan anchored by Sen. Chuck Schumer and Sen. Orrin Hatch would cut 2010 payroll taxes cut for all new hires.

Let's compare the pluses and minuses of each plan:


Hiring Tax Credit

What It Is: This is how the White House described its job creation plan:

• Tax credits for new hires. A small business that hires ten new employees in 2010 will receive a $50,000 tax credit to help offset the costs of those new hires. However, if the same small business lays off ten employees in 2010 and hires five new employees, it would receive no credit.

• Tax credits for pay raises. A small business with 50 employees that, through increased hours or higher pay, provides all of its employees a $1,000 real wage increase in 2010 will receive a $3,100 tax credit, enough to cover the Social Security payroll taxes on those increases.

Why It Might Work: All job creation schemes will inevitably reward employers for jobs they would have created anyway. But Tim Bartik at the Economic Policy Institute found modeled the hiring tax credit and predicted only 1 induced jobs for every 5.6 subsidized jobs. But the White House goes even further. Since boosting demand and growth is about hours and wages in addition to raw job number they'll incent wage increases by refunding payroll taxes "for every dollar that [employers] increase those wages faster than inflation."

Why It Might Not: Three large reasons: it can be gamed, it can be complicated, and it doesn't juice demand enough from the start. It can be gamed by swapping full-time employees for part-timers. The CBO found the the New Jobs Tax Credit from the mid-1970s was too complicated for many firms to actually use, which led to mixed results.  Finally, critics ask: what if nobody takes advantage of the credit because employers are holding off hirings until demand grows? After all, $5000 isn't a lot of money. If you're an employer facing thinning profits, you're not going to hire somebody for the promise of a couple thousand dollars. You'll hire somebody when business picks up.

Payroll Tax Break

What It Is: This is the one-paragraph summary from Schumer and Hatch's NYT op-ed:

Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That's it.

Why It Might Work: Some say the hiring tax credit does too little to juice demand from the start. But the payroll tax hits both employers and employees -- meaning a payroll tax cut would put money in the hands of both employers and employees. This is significant from the demand side because workers, armed with extra dough, might buy more goods, increasing the broad demand that many employers want to see before they start hiring. Moreover, Schumer and Hatch argue that since their tax break ends in 2011, employers are incented to hire immediately to maximize the tax benefit. They also argue that it's easy for employers to understand: they just zero out the tax on their payroll software, and that's it.

Why It Might Not: Like any incentive program, this plan could conceivably be gamed by employers, or alternatively appear too complicated for them to even use it. The other concern is cost. The CBO estimated that the budgetary cost of increasing employment by one full-time person for one year would probably be between $56,000 and $125,000. Their models indicated that a payroll break for new hires would be one of the most cost-effective strategies for juicing employment, but not everybody agrees. EPI's Bartik would argue that elimating payroll taxes for all of 2010 ultimately costs the federal government more per added worker than a one-time hiring tax credit. In other words, the generosity of this plan is both its strength and weakness.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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