The Wrong Tax Cut


The Obama administration, bolstered by like-minded economists such as Dani Rodrik, is pressing for a two-year tax credit for businesses that hire new workers or add significantly to the hours of present workers. Give them this: They’re halfway there — payroll taxes are a drag on productivity and therefore a source of unemployment. But temporary, halfhearted, narrow measures such as this will do little or nothing to bring about the robust economic recovery that is necessary to put idled Americans back to work.

In the first year, the tax credit would be equal to roughly twice the payroll tax that would be due on each new employee’s salary in the first year, and the credit would be scaled back in the second year. The New York Times calculates that the credit, applied to a new worker hired at a salary of $50,000, would be worth $7,650 to an employer in the first year and $5,100 in the second. Is that sufficient to encourage a business to add a full-time worker? It may be, in some cases. But successful businessmen often are in the habit of thinking more than 24 months into the future, especially when hiring a full-time worker. It takes time to train a new employee and to integrate him into the business. In many firms, a new full-time employee doing a job of any complexity (and those $50,000 salaries in the Times’s hypothesis aren’t being paid to unskilled laborers) may take a year or more to become a productive asset. Further, the economic logic of the tax credit argues that these marginal hires will no longer represent good investments once the tax credit expires — but employers know from experience that letting workers go, even for good reason, can be a tricky thing, and sometimes an expensive one.

Likewise, the tax credit for expanding workers’ hours is most likely to be claimed by employers making part-timers full-time staff — temporarily. It is easy to see how the tax credit could be gamed without producing its intended effect: real growth in real jobs.

Unemployment is a consequence of the recession, not the cause of it. It is also a lagging indicator: that is, the overall economic picture will probably improve significantly before employment catches up. The Obama administration, in spite of its hubris, is in no position to manage the hiring decisions of the millions of diverse employers in America’s vastly complex economy — and needle-nosed tax credits are too narrow an instrument to move the employment numbers. Jobs cannot simply be willed into existence through acts of political engineering.

The Obama administration is right to identify the payroll tax as a particularly onerous burden, though it lays heavier upon employees than on business operators, who simply reduce wages to offset tax expenses. A better solution would be a permanent reduction in the payroll-tax rate: That would improve the long-term productivity of each new hire — and productivity is what determines employment and wages. But genuine reform of payroll taxes implies genuine reform in the entitlement programs they are intended to support — Social Security and Medicare — and that is one job that the Obama administration is not going to take.

Editor’s note: This editorial has been corrected since posting.