Democrats balk at $30 billion tax credit for employers

Barack Obama unveiled one policy in his State of the Union speech that initially sounded good to conservatives — a tax credit to incentivize hiring and wage increases in small businesses.  He proposed a $5000 credit for every new hire or every wage increase, although he tied it rhetorically to a new loan-incentive program that keeps TARP in business:

We should start where most new jobs do – in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides its time she became her own boss.

Through sheer grit and determination, these companies have weathered the recession and are ready to grow.  But when you talk to small business owners in places like Allentown, Pennsylvania or Elyria, Ohio, you find out that even though banks on Wall Street are lending again, they are mostly lending to bigger companies.  But financing remains difficult for small business owners across the country.

So tonight, I’m proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat.  I am also proposing a new small business tax credit – one that will go to over one million small businesses who hire new workers or raise wages.  While we’re at it, let’s also eliminate all capital gains taxes on small business investment; and provide a tax incentive for all businesses, large and small, to invest in new plants and equipment.

At least some of this makes sense, especially the elimination of capital-gains taxes on small business investment.  Many would argue for across-the-board cuts in CG taxes, or elimination of CG taxes entirely.  Such an environment would spur more risk-taking of a healthy kind, as people put their money into the kind of new ventures and expansion that lead to actual job creation.  Why give corporations a better tax break than individuals, after all, when both investor classes have the same impact?

The tax breaks for hiring and wage increases looks more like a gimmick than a policy, and even Obama’s allies in Congress scoff at it:

President Obama’s $33 billion proposal to offer payroll tax credits to create jobs is being met with opposition among some House Democrats who question whether the incentives are strong enough.

Rep. Mike Thompson, California Democrat, questioned whether a $5,000 payroll tax credit for every net new employee is strong enough to have an impact on the country’s 10 percent unemployment rate.

“I don’t know anybody in business who hires an employee because they’re going to get a tax break,” Mr. Thompson said at a House Ways and Means Committee hearing with Treasury Secretary Timothy F. Geithner. “People hire employees because they have work to do.”

Rep. Lloyd Doggett, Texas Democrat, cited “general consensus among tax experts is that the credit is a stinker because it simply encourages people to do what they would have done anyway.”

This part of Obama’s plan seems poorly conceived.  At even a minimum-wage position, the cost of an employee (with the kind of benefits Obama intends to mandate in other policies) would cost a business at least four times as much as the incentive.  On the other hand, the application of the incentive to wage increases is more likely to deter employers from hiring than to incentivize them.  A $2000 raise, or roughly $1 an hour, would allow the employer to demand more productivity from an existing employee while pocketing the tax credit difference of $3000.

Businesses do not hire people to cash in on tax credits.  They hire people when they have too much work for their existing workforce.  The tax incentive won’t prompt businesses to hire people without first having the unfilled demand.  Anyone who had a passing knowledge of business practice and actual accounting would have seen this immediately.  As Doggett points out, businesses who claim the tax credit would have hired new employees anyway, and those that cannot afford new hires won’t change their mind for a tax credit of only five grand.

The entire notion of providing incentives for hiring that is disconnected from demand reveals a mindset where central planning is given higher priority than market conditions.  Obama would do better to relieve the tax burden on investors and scale back the regulatory Leviathan he’s attempting to build.  We can have a real recovery if Obama would just get out of the way.

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