Don't Expect Tax Breaks to Boost Hiring

There is chatter Friday that Congress is considering new tax breaks for corporations that hire unemployed workers. On the face of it this might seem like a good idea; incentivize companies to start hiring again. The only problem is that this is yet another example of a tax cut that won’t work. Proponents of tax cuts seem to think they can solve any problem in a capitalist economy, but that argument defies logic much of the time.

I have long argued that cutting the capital gains tax from 20% to 15% (as the Republican-led Congress did under President Bush) did nothing to boost demand for stock market related investments. The argument seemed to be that lower tax rates on profits would encourage more capital being allocated to the market, but that conclusion falsely assumed that the chief reason investors buy stocks is to save money on taxes.

In reality, we buy stocks if we think we can make a profit from doing so. Nobody was avoiding the stock market because of a 20% tax rate of capital gains (which, if anything, would encourage investing since it was lower than the income tax rate). They were avoiding the market because they didn’t think they could make good money in it. Cutting the tax rate on stock gains from 20% to 15% doesn’t make investing any more attractive to people because a 20% tax rate wasn’t what was holding them back to begin with.

The situation with any corporate tax break for hiring unemployed workers is essentially the same. Companies don’t hire workers based on tax rates, they hire them based on whether they need them in order to produce the amount of goods and services demanded by their customers. No competent CEO is going to hire a worker he or she doesn’t need simply to get a tax break. That would be like making a charitable donation simply to get the tax deduction (you wind up foolishly spending a dollar in order to save 30 cents).

Don’t get me wrong, I am all in favor of incentives (unfortunately, our country all too often needs to rely on them to get people to do productive things they otherwise wouldn’t), but we have to match up the incentive with the desired behavior. If we don’t, it’s just wasted time, money, and effort.

Comments

[CautiousInv...:]

I tend to agree with your sentiments in the abstract but if we examine this proposal in the context of the current stimulus plan and likely subsequent efforts, it becomes astonishing brilliant.

The NYT had a piece on this a day or so ago and the last time we tried something like this was in the late 70's when unemployment was still flagging from the recession several years earlier. Liberals economists like these policies, of course, while conservative economists do not. A study suggested that about 1/3 of the firms awarded the credit hired because of the credit; it's impossible to exclude firms that would hire anyway and simply take advantage of the credit.

Because of the inherent waste and the preference to rely upon markets, my qualified take on this is that its vastly better than pretending to help someone by training them for a job that does not exist; this is simply a transfer payment in a halloween costume. So were we to reduce the unspent stimulus by X amount and put the employment tax credit in its place it would be a huge improvement upon what is largely a farrago of waste.

Oct 09 03:39 PM

[Pat C:]

How about direct investment in 21st Century jobs and investments. We keep going after all these indirect methods of creating jobs and hoping for the best and being largely disappointed. Select labor intensive capital investments such as natural gas drilling, windmill or solar manufacturing and installation etc. etc. Make a commitment that these are new American only projects. Let the U.S. private market know they get a first shot at it and if they don't take advantage of it, the Government will and when it comes time to sell, the Government won't be giving it away. This is a shared public and private responsibility lets get on with it. If this sounds socialist, so be it.

Oct 09 06:01 PM

[Pat C:]

Another thing, I would like to see something other than noise, that reducing U.S. capital gains actually tax stimulates real investment and jobs here in the U.S. Hasn't the last decade pretty much proved that this is as a myth?

Oct 09 06:06 PM

[Tom E.:]

Cash for clunkers boosted auto sales. Of course you could argue that the program took from future sales.

Tax credits would probably boost hiring and would take from future hiring's. However, in an economy where the consumer is 70% of GDP, more jobs will create demand for even more jobs. A process that feeds on itself.

Businesses are whipping their employees to get the max out of them. Employee relations are near the breaking point. This could be the thing to get business owners off the dime to start hiring and get the economy moving.

Government actions can make a difference, it depends on timing and degree. Cutting the top tax rate from 90% to 35% did make a difference and unleashed animal spirits. Cutting it a few points lower probably would not make a difference.

Oct 09 10:12 PM

[Mr. Ed, Jr.:]

First, capital gains is not just about investing in the stock market. In fact, that is a small piece of it. An entrepreneur certainly is going to evaluate ROI before committing capital to any new business. Yes, I know the silly argument that nobody will throw away a million dollar business idea solely because the capital gains tax is a couple % points higher. But serious business people understand that there is great risk in starting a new business, and the failure rate keeps them in the real world, not fantasyland.

When the economy is booming, and consumers are employed and spending, capital seeks new opportunities in business because the estimated ROI is attractive. The cap gains rate is of lesser importance.

In a deep and financially chaotic recession-- one in which famous, celebrated economists argue about whether we are experiencing inflation or deflation-- significantly lowering, or even eliminating the cap gains tax might be extremely beneficial.

There is such a thing as using the tools in the toolbox correctly, but our government would not know about that.

As for a tax break for new hiring....I cannot imagine what level of tax break would be needed to get an employer-- in this brutal economy-- to hire someone he does not need.

There is no chance my business can hire anyone back at this time.

There are federal, state and local taxes and fees that are add-ons to every employee's salary. Health insurance , unemployment insurance, matching FICA, and some areas even have tax surcharges for each employee. ( You might be surprised at the fees and taxes idiot politicians will devise to make businesses-- and now the employees who lose their jobs-- pay for their foolish schemes )

When business starts to pick up, we have to be extremely concerned about an economic relapse (double-dip), so we will first be slowly restoring the hours of the current staff. If necessary, we would likely prefer overtime to hiring back a previous employee or absorbing the expense of training a new employee. For new employees, there is always a less productive learning phase that is accepted in good times, but not so much during a recession.

Some businesses need to hire, even in a recession. It may be that their business (Perhaps they are a law firm specializing in bankruptcy) is doing better than most, or there may have been some attrition. Giving a tax break to a business that actually needs a new hire seems like a waste of money.

But I find it very difficult to believe that a well-managed business would hire anyone today that they did not need just because they were getting a tax break. Unless, of course, the tax break was so great that it forced their hand. If that is the case, why not cut out the middleman and just have the government hire the person directly ?

Oct 09 11:39 PM

[conceptwizard:]

Nationwide, effective office rents fell 8.5% in the third quarter compared with the same period a year ago, the steepest year-over-year decline since 1995, according to Reis Inc., a New York real-estate research firm.

The decline came as companies returned a net 19.6 million square feet of space to landlords in the third quarter, slightly more than in the second quarter. For the first three quarters of this year, the net decline in occupied space totaled a record 64.2 million square feet, the highest so-called negative absorption recorded since Reis began tracking the data in 1980. (That doesn't count space that left the market as a result of the 2001 terrorist attacks.) The vacancy rate, meanwhile, hit 16.5%, a five-year high, according to Reis.

Companies are trying to survive not hire.

Oct 09 11:43 PM

[LilBob:]

New York State had issues with providing tax cuts for companies that provided new jobs in Empire Zones. The legislation led to a flood of existing companies filing paper work to establish spin-off corporations that didn't actually create any new jobs, but just shuffled existing employees to the aegis of the new corporate identity to qualify for the tax credit. Millions of dollars in tax breaks were given out before the media picked up on this widespread chicanery and voters were not pleased. The New York State Senate had to significantly scale back the program. Hopefully the federal government will learn from New York States errors to avoid the same type of outcomes.

Oct 10 06:58 AM

[Pauly B:]

Your right Chad, CEO's are not going to hire workers just because they are going to get a tax break. They are going to hire workers because there is demand for their product.

It seems some in Washington fail to realize we have a deflationary spiral going on here. People must have confidence before they buy.

If I can't even get my flu shot because of Washington (ya they screwed that up too) how are they going to create a jobs!

Oct 10 09:36 AM

[W.E. Heasley:]

Agree with you Chad that a tax incentive to hire is way off the mark. However, agree with Mr. Ed Jr. regarding the Capital Gains Tax, as Ed is correct in that the stock market effect you describe is a minor component with in the entire Capital Gains arena.

Moreover, employers have a vast amount of uncertainty on their plate: Cap and Trade leading to higher production costs, Socialized Medicine and the unknown cost/coverage, a Spruce Goose of a stimulus plan creating no additional demand, a consumer segment deleveraging and the effect on demand, a 16% real unemployment rate and this segment of consumers purchasing staples only, and finally the spector of higher taxes in general.

Few if any employers is going to hire due to a mere tax break when faced with so much uncertainty.

Oct 10 05:40 PM

[MarkitWacha:]

In this economy, where the velocity of money has been cut in half, as has credit (loans made), There is another alternative to tax.

Rather than have capital gains tax, just print the money. The tax doesn't bring in nearly as much as what's been printed this year anyway. I saw that the corporate taxes were bringing in somewhere around 130 billion. That would be a huge stimulus to all businesses, removing the frictions that are slowing down small business owners like myself. Removing the onus of reporting all the capital transactions would speed things up 10 fold or more.

So, rather than paying a million accountants to get the taxation just right or to avoid taxes using the various tricks of the trade, accept that the federal government will tax us all via inflation. This doesn't apply to local and state governments. One of the three having too much power is bad enough.

Of course, this only applies to the extraordinary circumstances that surround us right now. It might be overkill, and maybe this strategy should be saved for dire times, like next year when the commercial mortgages begin failing as badly as residential already has.


On Oct 09 06:06 PM Pat C wrote:

> Another thing, I would like to see something other than noise, that
> reducing U.S. capital gains actually tax stimulates real investment
> and jobs here in the U.S. Hasn't the last decade pretty much proved
> that this is as a myth?

Oct 10 07:37 PM

[Moon Kil Woong:]

The US can't even handle the spending hole we have dug without offsetting revenue. There is more than not any room to cut revenue or add spending. Politican's andwer to everything is spend spend spend or give give give.

Letting people decide what is affordable or more economicaly efficient is better than government deciding but under such logic we should effectively dismantle most if not all of government (save law and safety). The funny thing is people are saying what is loud and clear by now. It's time to pare losses and save, not spend. Once again the market's logic is impeccable. Unfortunately, it clashes with the debt ridden inflation the Federal Government and Federal Reserve want and need. It's impossible to steal from people if you can't spend their money or their future money or steal their money's value by printing more.

Oct 11 12:34 AM

[Liz:]

Why would an employer hire someone if they're not doing enough business to justify the cost?

FACT: Consumers are strapped. They are saving. As such, they are not spending.

No amount of tax credits is going to induce employers to hire if there are no customers spending money.

Oct 11 01:23 AM

[Alphameister:]

Cut taxes generally, starting with the ridiculously high corporate income tax, and let the market decide where new hires are appropriate. This tinkering by inept politicians who want to appear useful is what got us into this mess in the first place. Anyone care to speculate on how long before we follow the European approach of putting restrictions on the ability of companies to terminate the employment of their workers?

Oct 11 10:39 AM