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.