Two Bad Tax Ideas for Creating Jobs

In Washington, bad ideas never go away. Now two old tax breaks have resurfaced with the ostensible goal of creating jobs, despite plenty of evidence that neither actually works. One would create a payroll tax break (aimed at employers instead of workers this time). The other would grant a temporary tax holiday to multinational corporations that bring foreign earnings back to the U.S.

Not only is there little evidence that either of these tax breaks would create jobs but they also fly in the face of all the recent rhetoric about the need to eliminate such preferences from the tax code. Politicians give a speech on Tuesday decrying special interest tax breaks. They give another on Wednesday promoting these subsidies as job creators.

This might be defensible if it were true. But it isn’t.

Let’s start with the tax break for bringing back foreign earnings, a practice known as repatriation. To understand what this is about, take a second to review some history. Multinationals such as Google are highly skilled at reducing their U.S. tax bill to near-zero, in part by shifting income to low-tax countries. However, when they return that money to the U.S. they owe tax here at the top rate of 35 percent. As a result, they keep those earnings overseas more or less indefinitely.

Back in 2004, Congress  granted a two-year tax holiday to firms that agreed to use repatriated profits to make investments and hire workers in the U.S. In 2005, U.S. firms repatriated about $300 billion—far more than in prior years. They saved billions of dollars in taxes. But a 2009 study found that they used every repatriated dollar to pay down debt or make distributions to shareholders, rather than create jobs.  

There is no reason to believe the outcome would be different this time. The firms that are best able to take advantage of the tax holiday are awash in cash at the moment. If they want to hire or invest, they already have plenty of resources to do so without the benefit of another tax break.

Such as scheme would create few jobs and reduce federal revenues by nearly $80 billion over a decade. Most importantly, it would send a terrible signal. Congress would be rewarding firms for successfully manipulating the tax code. The biggest winners in fact would be the very companies that did the best job shuffling profits overseas.   

In fact, yet another tax holiday would likely discourage future investment in the U.S. Multinationals would, perfectly reasonably, come to expect a repatriation tax break every couple of years. So instead of investing in the U.S., they’d increase their stash of foreign profits while they await the next holiday.

The payroll tax story is not so different. Last December, President Obama convinced Congress to include a one-year payroll tax break for workers as part of the deal that extended the 2001 and 2003 tax cuts. Now, Democrats would like to continue it for another year. But with Republicans unwilling to support an extension aimed at workers, Obama and Senate Democrats are peddling a payroll tax cut for companies (most likely for hiring new workers). 

This also promises to be a boondoggle.

We don’t know what the tax cut would be, but let’s say it would reduce the employer share by half, or about 3 percent. That comes out to an average tax cut of about $1,200 for each new employee. Would a company hire a new worker for, say, $38,800 instead of $40,000? Most wouldn’t.  At this point in the business cycle, firms hire when they need workers to fill orders, not to get a relatively small tax break.

Of course, companies operating at full capacity would be happy to take the tax cut. But for them, it would be little more than a windfall for doing what they were going to do anyway.

I understand that the unemployment rate is still 9 percent and, with an election looming, pols are desparate to do something to reduce it. But I wish they’d at least come up with some new bad ideas instead of recycling the same old ones.