Tax credits for all good things

October 8th, 2009 by Joe Kristan

Even though we’re supposed to be in a recovery, it’s not so much of one that you can tell.
People aren’t hiring. How do our Congressional supergeniuses propose to deal with it? They propose to pass a law paying people to hire people:

The idea of a tax credit for companies that create new jobs, something the federal government has not tried since the 1970s, is gaining support among economists and Washington officials grappling with the highest unemployment in a generation.

(via Peter Pappas)
Why hasn’t it been tried since the ’70s? Maybe because it didn’t work then, either. I’m not sure which economists think it’s a great idea, but Harvard economist Greg Mankiw isn’t sold:
Usually, these proposals measure marginal jobs by comparing employment to some base year. Thus, a company gets a tax credit for employment that exceeds, say, 90 percent of employment in 2007. But then, the incentive goes mainly to companies in regions and industries that have been expanding or shrinking only slightly. Those regions and industries that have been deeply contracting do not have an incentive for marginal hires, because their employment levels are now well below the base levels. The playing field is tilted against those regions and industries that have been hit hardest–a result that seems to diminish both equality and efficiency.
Also, how do you handle newly formed companies? Government should not penalize start-ups by subsidizing only employment by their incumbent competitors. But if new companies get the hiring credit, then existing companies are incentivized to create new wholly-owned subsidiaries in order to qualify for the tax break (while contracting employment in the parent company). Similarly, they are incentivized to outsource work to start-ups that get the credit.

Too many people think that if they want a good thing, all they have to do is pass a law, or a tax credit, that encourages the good thing, and good things will happen. It really doesn’t work that way. If it did, we could just pass a “happy fun times tax credit” and send Congress home. Though if they stayed home, it would be progress.
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