More on the New Jobs Tax Credit

By :: January 9th, 2009

Good to see comments on the New Jobs Tax Credit from two authors of papers on the subject, Timothy J. Bartik of the Upjohn Institute and John H. Bishop of Cornell. In response to my criticism of Barack Obama’s call for an employer credit to encourage hiring, both argue that the Carter-era version of this idea—the 1977-78 New Jobs Tax Credit—succeeded in creating as many as 700,000 new jobs in the first year.

Dr. Bartik has written a book on the subject, and Professor Bishop is the author of several scholarly articles on the credit. Both know far more about this than I. However, after reading two of Bishop’s pieces, an essay by Bartik, as well as an article by Jeffrey Perloff and Michael Wachter and Emil Sunley’s tale of the credit’s rather sad history—which TaxVox posted yesterday—I remain far from convinced that this is a good idea.

One problem is the evidence of success Bishop and Bartik cite is very limited. It is based on two surveys, one by the federal government and the other by a business group, which asked whether companies knew about the credit and whether they increased employment. The results: Those aware of the credit hired 3 percent more than those that didn’t. But Perloff and Wachter, who did the initial research on the plan, warned that these results “should be viewed with caution.” Among the difficulties: the sample was not random, and growing companies were the very ones that had the greatest incentive to learn about the credit. Thus, hiring plans may have driven knowledge about the tax break, rather than the other way around.

In addition, the Carter-era plan was very different from what Obama is talking about. Finally, both men acknowledge the old credit was extremely inefficient: About two-thirds of the jobs it subsidized would have been created anyway. Not much bang-for-the-buck.

There are several challenges to designing a workable credit. As I noted in my original post, businesses losing money (those most likely to be cutting jobs) get no immediate benefit unless the credit is made refundable or is used to offset their payroll taxes—either of which create all kinds of other problems. Also, Bishop concedes that in today’s awful economy a relatively paltry $3000 government subsidy won’t encourage many companies to hire. So he suggests a credit of $6550. This would generate more interest, for sure, but it would also more than double the cost and increase the potential windfall to those businesses that would be hiring anyway.

That brings us to the opportunities to game the system. It happens all the time with business credits. The R&D credit, for example, may do more to encourage companies to shuffle internal costs than increase actual research. The problem, of course, is that the more anti-abuse rules, the less attractive the credit becomes to companies that truly could use it.

It still seems that the easiest way to create jobs is the old fashioned method: Boost demand. I’d rather give the money to people who are going to spend it and let their increased consumption drive the job market.