New Jobs Tax Credit (From the Archives)

By :: January 9th, 2009

Emil Sunley was the Deputy Assistant Secretary for Tax Analysis at Jimmy Carter's Treasury in 1977. In a 1980 Brookings volume, he recounted the history of this credit, which had morphed into a very complicated and largely ineffective subsidy as it worked its way through the legislative process. It is a cautionary tale for the Obama team and its allies in Congress.

Here is the summary from Sunley's chapter:

The new jobs tax credit was a product of the legislative process, which has often transformed simple proposals into complex laws. The president’s original proposal was for an optional income tax credit of 4 percent of social security taxes paid by employers. This credit would have had a small anti-inflationary effect in the short run and would have put general revenues into social security through the back door. Congress wanted instead to provide a greater incentive targeted on additional employment, recognizing that the base for any incremental credit must be somewhat arbitrary, as it is not possible to know the number of employees a firm would have had if the credit had not been enacted. The complexity of the jobs credit, which resulted in a number of economic distortions, arose because Congress wanted the credit to be incremental, to do something for the handicapped, and to avoid excessively favorable treatment for new firms that might be competing with old firms. Congress, however, adopted an arbitrary base for its incremental credit. This decision minimized the record-keeping burdens but led to the distortions favoring rapidly growing firms, industries, and regions of the country.

The impact of the credit on jobs was slight. In many firms those who make hiring decisions did not understand the firm’s tax status. In addition, some time passes between the employment decision and the determination of eligibility for the credit.

Because the capital stock is fixed in the short run, to increase employment significantly, demand for output must increase. An incremental tax cut tied to employment will not by itself generate that increase in demand. Moreover, a temporary incremental credit is unlikely to affect significantly the long-run substitution of labor for capital.

The short life of the jobs credit ended when President Carter failed to recommend its extension beyond 1978. Instead he recommended as part of his urban program a targeted jobs credit that was not incremental and was limited to the hiring of disadvantaged young people and the handicapped. Congress generally accepted the president’s recommendations and enacted a targeted jobs credit as part of the Revenue Act of 1978, allowing the former broader jobs credit to expire at the end of 1978 as scheduled.

Source: Henry J. Aaron and Michael J. Boskin, eds., The Economics of Taxation, Washington, DC: Brookings Institution Press, 1980. Reprinted by permission.

The full chapter is available here.