New hiring credit: Probable law or packed with pitfalls?

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Next up on the Obama administration’s agenda could be an incentive to hire, with the goal of jobs creation. So far, the plans to propose such a credit are being kept somewhat quiet. But the idea does seem to have at least modest bipartisan support, in the wake of the worst unemployment figures since the late seventies --  9.8% in September, and rising. 

Virginia Congressman Eric Cantor (R)  told reporters, “There is a lot of traction for this kind of idea.  If the White House will take the lead on this, I’m fairly positive it would be welcomed in a bipartisan fashion.”

If this becomes reality, the intent of the two-year credit will be to make it cheaper to hire new employees. No details have been set in stone, but here is a rough idea of how it will work:

·         The first year credit will equal 15.3 percent of the cost of adding one new employee, up to a salary of $106,800.

·         The second year, the credit will amount to 10.2 percent of the cost. 

Others suggest that, if they lower the salary cap further, this could be even more beneficial to unskilled workers, creating as many as two million jobs in the first couple of years of the credit.

Yet another version of the bill that is being considered will make credits available not only to businesses that hire new employees, but also to those that significantly increase work hours of existing employees, such as turning a part-time job into full-time.

Who supports the hiring credit?

Among others, supporters of the credit include former Labor Secretary Robert B. Reich, and Edmund S. Phelps, a Nobel Laureate and economics professor at Columbia.

“It’s beautiful if it can be timed at a dire moment like this, when unemployment is way too high and appears to be going somewhat higher,” Phelps told reporters.  “But it’s a pity that this wasn’t done a year ago.” Phelps said he believed President Obama should not have dropped the hiring credit from the $787 billion stimulus plan that was passed last February.

Robert Wilens, President of a New York tax and account advisory firm thinks the credit might be successful. “Businesses like those provisions that reduce the hurdle rate that you have to surmount in order to make an investment — like an employee — a profitable investment.”

What are the concerns?

Beyond concerns about a rapidly-mounting deficit, critics worry about the real potential for the program's success. Will unscrupulous employers exploit possible loopholes? These could include a company shutting down, letting the staff go, then reopening as a new company and rehiring the staff as new employees, all of whom might qualify for the credit, and zero new jobs would be created.

Bill Rys, tax counsel for the National Federation of Independent Business asks, “Why would a business hire a new worker? They’re hiring because they need to do work. Unless you have work to do, it’s still an expense.”

Others point out that some businesses are still hiring, yet they will qualify for, and probably get the credit anyway, and thus zero new jobs will result from those credits.

Some economists believe that a hiring credit like this could backfire. Lee E. Ohanian, economics professor at the University of California, Los Angeles, points out that this could actually impede economic recovery. “Particularly for big employers, if they think a job creation tax credit is in the offing, it could certainly be an incentive to delay hiring.” Ohanian continued, “That means it could have the perverse effect of actually prolonging the recession.”

Brian Wesbury, chief economist at First Trust Advisors LP said recently in a Wall Street Journal editorial that agrees with those who project that companies will postpone their hiring plans until this government subsidy kicks in. He also says that a hiring credit program could stunt growth by confiscating private sector money to support the public sector. Wesbury suggests that the government's Robin hood mentality, as evidenced by the July bump in the federal minimum wage which had the effect of chilling new employment, is actually exacerbating the depressed job market.

In spite of arguments from the Obama administration that there will be a way to keep track of how many jobs are created, the lines are blurry. The last time a program such as this was tried was in the Carter years. Then, one in three new jobs was awarded the credit, but many of those jobs lacked permanence and it was later determined that some positions would have likely been created without the credit.

 In answer to the criticism that such a program was less than successful under the Carter Administration, those who support hiring credits suggest that we shouldn’t “throw the baby out with the bathwater.”  Instead, they want to learn some lessons from the 70s. For example, unlike the program under President Carter, the credits need to be well-publicized; the funds need to be distributed quarterly to more quickly pump some life into businesses that sorely need it; and the credits need to be available even to businesses that are not making money, such as not-for-profits and enterprises that are operating in the red.

Whether or not the hiring credits are a good idea, some experts predict they will happen because Obama needs this to deflect criticism of his economic policies, as well as to fulfill the campaign promise of new jobs that seems to have fallen by the wayside.

What do you think?


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