Which Tax Cuts are Best for the Economy?
|Written by Nicole Woo|
|Wednesday, 15 June 2011 14:48|
With much chatter over the past week about the White House suggesting an employer-side payroll tax cut to stimulate the economy and hiring, let's look at what CEPR's Dean Baker (currently on vacation) said about the Schumer-Hatch employer tax credit for new hires that was in effect for much of 2010:
There has been extensive research on the impact of the minimum wage on employment, almost all of which finds that the 15-20 percent increase in the cost of labor that resulted from recent increases in the minimum wage have led to no measurable decline in employment. If a 15-20 percent increase in the cost of labor does not cause firms to cutback employment, then we can’t believe that the 6.2 percent decline in the cost of labor from the Schumer-Hatch bill will lead to any noticeable increase in employment.
Recently, the Economix blog in the New York Times noted about this policy:
Congress passed a temporary job creation tax cut last year that does not seem to have been terribly effective.
Remember: That tax credit was for the full 6.2% in payroll taxes paid by employers, while the current idea being floated is for a cut of only 2%, so we can assume the effect would be even more miniscule.
Are there tax cuts that could work better?
Does the phrase "Making Work Pay" ring a bell? At the end of last year, the Making Work Pay tax credit ended. As CEPR's Shawn Fremstad pointed out earlier this year, that policy was more progressive than a payroll tax cut, providing greater relative financial relief to low-income and disabled workers, who are more likely to spend any extra money in their pockets than those with higher incomes.
And there's an employer tax credit for work-sharing, another idea from Dean Baker. The Nation magazine this week calls it one of The Five Smartest Congressional Bills You've Never Heard Of:
Wouldn’t it be nice to work fewer hours but still get paid the same salary? Some economists, like Paul Krugman and Dean Baker, are saying that it’s not only possible, but that the country could create millions of jobs and add billions of dollars to the GDP by doing so.
Michigan Congressman John Conyers has taken up the initiative by sponsoring the SHARE Act, a job-creation program that offers a tax credit of up to $3,000 to employers who shorten workers’ hours in the form of “paid sick days, paid family leave, shorter workweeks or longer vacations.”
The logic works as follows: Because workers’ salaries would remain unchanged as a result of the paid time off, aggregate demand in the economy would also remain unchanged or even rise because of greater leisure time for consumer activities. Therefore employers will have to maintain productivity levels by hiring more workers to make up for lost labor input. Not only would workers reap the rewards of more leisure time without penalty, but potentially millions of unemployed individuals would be put to work at relatively low cost.
The plan would cost the government roughly $26,000 per new job created, according to the Center for Economic and Policy Research. That’s far less than the CBO-estimated average cost of as much as $200,000 per job created by the 2009 stimulus package. It’s also far less than the average cost of more than $190,000 for every job created by subsidizing the fossil fuel industries.
In Germany, a similar tax credit in exchange for shortening work hours resulted in a steady unemployment rate of 7.6 percent throughout the recession, the same rate they had prior to the economic downturn. “Imagine if workers in the United States, like workers in Germany, were dealing with the recession by putting in four-day weeks (while getting paid for five) or getting an extra two weeks of paid vacation,” writes Conyers. “This sure beats being unemployed.”
Since the tax credit is designed largely in response to the recession, it would presumably be temporary. But keeping the measure in place may turn out to be advantageous for the economy in the long run. “If the new arrangements prove better for workers and employers then many employers will opt to keep them even after the tax credit has expired,” says economist Dean Baker. “In this way, the tax credit may go far towards making benefits like paid family leave or paid sick days universal and moving the United States towards a shorter work year.”