In broad strokes, the difference is this: The tax credit would likely be smaller and more surgical, with the benefits going to companies to reduce the marginal cost of new hires. The payroll tax chops FICA taxes (your Social Security and Medicare contributions), which are shared by employers and employees. That means businesses would have more money to make hires and workers would have more money to spend. It also makes it a blunter instrument that lacks incentives as specific as "no money until you hire."
The Economic Policy Institute says a job creation tax credit could create 5.1 million jobs in two years, costing the government about $27 billion. Timothy Bartik and John Bishop write:
The problem with these "tax incentive" policices is that they can always be gamed. Employers might try to finagle tax credits for hires they've already made, or were poised to make anyway. Some are concerned that firms might fire workers before the start date of the credit and hire them back when the credit kicks in, which would effectively mean the government's just handing out money to the companies.• A job creation tax credit that refunded 15% of new wage costs in 2010 and 10% of new wage costs in 2011 could create 5.1 million additional jobs in the U.S. economy over these two years.
• The net cost of the tax credit would be roughly $27 billion, or about $5,400 per new full-time-equivalent job created over these two years.
Now let's consider the payroll tax. Michael Kinsley wrote a great defense of the payroll tax holiday during the debate over the first stimulus. Here's his argument:
In December 2001, in the teeth of a not-quite-Great Recession, some guy named Peter Orszag with the Center on Budget and Policy Priorities outlined the challenges of a payroll tax holiday: namely that it doesn't help low-income workers enough, and that it could produce a windfall for businesses without guaranteeing that the money will be spent on new hires.FICA [Social Security and Medicare taxes shared by employer and employee] is, in effect, a tax on job creation. It applies to the very first dollar earned by a minimum-wage worker, but most of it tops out at an annual income of about $100,000 and doesn't apply at all to income from investments. For most Americans holding jobs, FICA now takes a bigger chunk of their income than the income tax itself. And yet it rarely enjoys the tender concern of tax-cutting Republicans, who prefer to concentrate on tax breaks for capital gains. Cutting the FICA tax in half, for workers and for employers, would make it more affordable for employers to hire -- or avoid layoffs -- while giving everyone who makes less than $100,000 a 7.5% raise to spend and stimulate the economy even further. People making more than $100,000 would get a tax cut too -- as big as anyone else's, though a smaller percentage of their incomes.
So which is better? My first instinct was to go with the job creation tax cut because I admired that it was a targeted stimulus rather than a broad cut. But right now I'm leaning toward something like Robert Reich's payroll tax cut proposal on the first $20,000 of income. That would make the stimulus highly progressive and limited, but maintain the dual benefits of the payroll tax cut--giving both employers and employees to spend more money on hires and goods.
D - None of the above.
Does anybody really believe that the ad agency that's suffering because clients have reduced ad spending is going to hire people just to get a tax break?
Is the maker of vinyl siding going to hire when there's a far reduced demand for his product to get a tax break?
You can go on and on but the simple truth is that companies hire based on demand for their product or, at the very least, projected demand for the product. Companies hire in order to meet product demand and this increase their profits. They don't hire due to some silly short term tax break.
Meanwhile, many of the proposed new laws from our wonderful liberal run DC project higher costs on employers. That does not exactly bode well for hiring.
As the co-author of the job creation tax credit proposal (with John Bishop), I want to make four quick responses to some of the comments here:
1. "Employers might try to finagle tax credits for hires they've already made, or were poised to make anyway." This is certainly true. Similar problems occur with any government policy. But you don't need a very high "hit rate" (ratio of truly induced jobs to total subsidized jobs) for a job creation tax credit to pay off. In our baseline model of the effects and costs of such a tax credit, our estimates indicate that there is only 1 induced jobs for every 5.6 subsidized jobs. Yet these estimates also suggest creation of 2.8 million jobs in 2010 at a net fiscal cost of less than $5,000.
2. "Some are concerned that firms might fire workers before the start date of the credit and hire them back when the credit kicks in, which would effectively mean the government's just handing out money to the companies." I don't think this is a serious problem with the proposal as we outlined it. The baseline period for calculating the tax credit in our proposal is the fourth quarter of 2008 to the third quarter of 2009. That is, the baseline period is PRIOR to this proposal being circulated. There is no way in which any employment decisions a firm makes now will lower their future credits. Therefore there is no incentive under this proposal to fire workers now.
3. In response to ed, above, who says "Companies hire in order to meet product demand and this increase their profits. They don't hire due to some silly short term tax break." No one is arguing that this proposal solves all problems for all employers, and will affect all employers. But this proposal only needs to affect SOME companies to be effective in creating jobs. The data strongly suggest that even in the current economy, there is a wide diversity of employer situations. For example, even in the current economy, there are some companies that are expanding. The concept of the tax credit is that there are some companies that without the credit, would have found it in their interest to hire, for example, 2 additional employees. With the credit, perhaps the company will find it in their interest to hire 3 additional employees. Furthermore, this argument is not just a theoretical argument. There is empirical evidence, which we review in our briefing paper, that the 1977-78 version of this tax credit was effective in inducing new job creation.
4. "But right now I'm leaning toward something like Robert Reich's payroll tax cut proposal on the first $20,000 of income. That would make the stimulus highly progressive and limited but maintain the dual benefits of the payroll tax cut for both employers and employees to spend more money on hires and goods." While such a proposal should be considered, I think we need to ask the following question: what would it cost and how many jobs would it create? I suspect, based on studies of other general tax cuts, that this proposal would have a gross cost per job created of over $100,000. This does not necessarily mean it is a bad idea, as the social benefits of creating jobs in the current economy are quite great. But I believe the numbers suggest that this proposal is much more expensive per job created than a job creation tax credit. Why not do both?
I would also point out that a payroll tax cut proposal provides tax credits for employment that would have occurred anyway. Specifically, since it applies to ALL employment, most of the jobs on which taxes are lowered would be there anyway. My guess is that there would be only one induced job for perhaps every 50 subsidized jobs.