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Quick, What's Wrong With a Tax Cut that Shortens Work Hours?

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Dean Baker
TPMCafé (Talking Points Memo), February 16, 2009

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Everyone knows that a policy that makes sense has no chance in Washington, but let's try. As we sit here with an economy that is throwing 20,000 people out of work every day, there may be some interest in trying policies that the geniuses running things had not previously considered.

Just to get our bearings, we are in a recession caused by lack of demand. People are not unemployed because we lack food, oil, computers, skilled labor, or anything else. People are out of work because we are not spending enough money.

This should make the public furious because it is not hard to spend money. The suffering that the public is experiencing right now is entirely because of a combination of ideology and ineptitude. If we increase demand (yes, we can print money), then there will be jobs, and the unemployment rate will tumble.

The tax credit for shorter work hours is so simple that even an economist can understand it.

The deal is that if an employer reduces work hours by providing paid time off in some form (e.g. paid parental leave, paid sick days, paid vacation, or shorter standard workweeks), then they will get a tax credit from the government to compensate for the reduced time, up to 10 percent of annual pay, not to exceed $2,500 per worker.

The logic is that companies will still be seeing just as much demand as before the tax break goes into effect. Workers' pay will not have changed; therefore they will be able to buy just as much as they did before the tax break took effect. If demand is the same, but the average worker is putting in fewer hours, then firms will want to hire more workers.

For example, if employers of 50 million workers cut hours by 10 percent, and then seek to replace the lost hours with additional workers, they would need to hire 5 million workers. If they got a $2,500 credit per worker, this would cost the government $125 billion a year.

There seems to be many benefits to going this route, and no obvious disadvantages. First, it can be put into place immediately. The day Congress passes the legislation, employers can begin adjusting work schedules to benefit from the tax cut. In other words, this proposal is as shovel ready as it gets.

Second, there is no risk of wasted spending, firms will offer paid time off in contexts where it makes sense for them and their employees. Companies will make adjustments that make sense given the structure of their workplace. In some cases, the best route could be shorter workweeks, in other cases, paid parental leave or sick days may offer the best route. The companies will decide for themselves which method, if any, works best.

Third, there is little risk of fraud. Companies would be getting the tax break for cutting back work time through some specific mechanism. The condition of getting the credit is that they post the work time reduction on the Internet. Workers will know whether or not they are getting paid family leave or whether or not they get overtime pay for working more than 36 hours a week. This should provide a very good check on efforts by employers to fraudulently claim the tax credit.

It is very difficult to see a downside risk in this story. The plan would be that the government would provide these credits for two years with the expectation that the economy is on a path to recovery by 2011. At that point, if workers and employers like the new work schedules then they may opt to keep them in place even without the tax credit, but that would be their choice. They would always the have option to return to the prior system.

If there is an obvious flaw in the working of this sort of tax credit, it would be interesting to see someone identify it. The fact is that millions of people are now unemployed because of the incredible blunders of the folks determining the country's economic policy. This tragedy will be intensified if these workers remain unemployed simply because the current crew of economic policymakers can't think beyond their standard game plan.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.