How Not to Create New Jobs

By :: September 28th, 2010

It is a good thing the “Creating American Jobs and Ending Offshoring Act,” which died in the Senate today, was never supposed to pass. That’s because it would have neither created American jobs nor ended offshoring (a word that never should have become a verb).

The bill, sponsored by Senate Democrats, had three parts: It would have given employers a two-year payroll tax exemption for hiring Americans to replace foreigners who do the same work overseas. It would bar companies from taking a tax deduction for the cost of moving operations to an overseas start-up. And it would require firms to pay taxes immediately on income they earn from importing products they make overseas. Currently, they can defer their U.S. taxes by letting their foreign subsidiaries hang on to their profits.   

I suppose the Senate’s debate today may serve some useful purpose as a show vote. Endangered Democrats can go home and argue that while they care deeply about American jobs, Republicans--who voted en masse to kill the bill--do not. But partisan politics aside, this is a classic example why Congress should not be allowed anywhere near tax policy during election season.

The payroll tax holiday is the silliest idea in this triptych of terrible tax policy. At their best, such schemes suffer from big design challenges. Unless their sponsors are very careful, firms can easily turn these laws into a tax windfall simply by employing someone they would have hired anyway. In its own broader proposal for a payroll tax holiday, the Obama Administration took a serious stab at curbing this problem. That plan, however, went nowhere in Congress.

The Senate bill made a half-hearted effort to prevent such abuses, but failed. The idea, I suppose, is that ABC Corp. would close its plant in Shanghai, lay off 200 Chinese, open a new plant in Sheboygan, bring in 50 Americans (since U.S. workers are more productive) and, for its trouble, get a two-year payroll tax holiday for those new hires. But in reality, multi-nationals are more likely to grab the tax break for the normal rotation of staff in and out of the U.S.

Besides, does anybody seriously expect firms to open and shut plants to take advantage of a modest two-year tax break?

And even if they did, how long do you think it would take for some subsidiary of the People’s Liberation Army to move into that abandoned Shanghai plant, restart production and under-price its Sheboygan competitor, thanks to dramatically lower wage rates and an artificially devalued currency that would dwarf the tax subsidy.

If Senate Democrats are truly worried about losing jobs overseas, they could rethink trade policy or even restructure the U.S. corporate tax code, which has evolved into a toxic combination of loopholes and high rates. But with this bill, it seems the only jobs they are seriously trying to protect are their own.



  1. Anonymous  ::  8:12 pm on September 28th, 2010:

    Yet another reason to consider a VAT and an expanded Business Income Tax to replace non-OASI payroll taxes and the Corporate Income Tax, as well as low rate personal income taxes.
    One wonders if the Fiscal Commission will consider this or whether it will require a new partisan mix in 2012 (with moderates finding common cause as the GOP implodes as the Palin Party).