Fox Business - Is a Tax Break the Right Incentive for Job Creation?
March 18, 2010
Is a Tax Break the Right Incentive for Job Creation?
By Mark Lieberman, Senior Economist
Thursday, March 18, 2010
President Obama Thursday signed what is by Washington standards a modest job creation bill with a price tag of $17.6 billion, which some economists say will create about 300,000 jobs.
The key piece of the bill is a bipartisan tax credit devised by Sen. Chuck Schumer (D-NY) and Sen. Orrin Hatch (R-UT) which would exempt business from paying Social Security taxes on new hires who had been unemployed for at least 60 days. This provision would save employers up to $6,621 (for an employee paid $100,000). On top of the waiver, companies who retain these new employees for a year can claim an additional credit of the lesser of 6.2% of wages paid – up to a maximum credit of $1,000. Those features of the bill are expected to cost $13 billion over 10 years and create 300,000 jobs – a cost of $43,333 per job.
Other elements of the bill, including extending a tax break for businesses that make capital investments, such as equipment purchases and expanding the use of the Build America Bonds program, which helps states and municipalities fund capital construction projects, take up the balance of the spending.
While the tax credit is considered an incentive, it may be too little or, in some cases, may not be necessary.
The average wage for U.S. workers, according to the most recent Bureau of Labor Statistics employment report, is just under $40,000 a year. The Social Security tax credit runs through the end of the year, so would apply to about $30,000 saving the typical business about $1,986. Social security taxes would resume January 1. To qualify for the additional $1,000 credit, an employer would have to pay $662 in Social Security taxes in the first quarter of next, so the credit would be a net $338.
But is the tax break the right incentive? To be sure, companies don’t hire new workers to save taxes but to add to revenues. According to an analysis by Sageworks Inc. which collects balance sheet and income statement data from thousands of businesses, profitability per employee has fallen in major industry sectors, making it arguable as to whether businesses would want to add new workers without creating new sales or profits.
Here’s how Sageworks broke down the numbers on a per employee basis.
- Construction: sales dropped 8.3% from 2008 to 2009; profit dropped 26.8%
- Manufacturing: sales dropped 12.3% from 2008 to 2009; profit dropped 31.8%
- Wholesale trade: sales dropped 9.75% from 2008 to 2009; profit dropped 28.1%
- Retail trade: sales dropped 6.1% from 2008 to 2009; profit rose 4.0%
- Education services (private): sales rose 7.6% from 2008 to 2009 but profit fell 27.2%
- Health care: sales rose 4.2% from 2008 to 2009 and profit rose 1.6%.
So the only sector in which adding employees might make sense is health care – a sector which has added about 23,000 jobs per month for the last year – without any incentives.
There are some other elements. The tax credit would offset payments governments are now making for unemployment benefits and the new jobs will produce new consumers to start the economic engine.