The most immediate issue in U.S. Federal tax policy today is the issue of the “tax extenders:” orphaned, temporary tax provisions that get their name from the way they are “extended” by Congress on an ad-hoc basis....
- The Tax Policy Blog
- Unintended Consequences of Job Creation Tax Credit
Unintended Consequences of Job Creation Tax Credit
The problem is, how do you define a marginal job? You cannot simply say "new hires." In that case, company A fires Peter and hires Paul. Company B fires Paul and hires Peter. That kind of employment churn is, presumably, not what we are trying to encourage.
Usually, these proposals measure marginal jobs by comparing employment to some base year. Thus, a company gets a tax credit for employment that exceeds, say, 90 percent of employment in 2007. But then, the incentives goes mainly to companies in regions and industries that are expanding or shrinking only slightly. Those regions and industries that are deeply contracting do not have an incentive for marginal hires, because their employment levels are now well below the base levels. The playing field is tilted against those regions and industries that have been hit hardest--a result that seems to diminish both equality and efficiency.
Also, how do you handle newly formed companies? Government should not penalize start-ups by subsidizing only employment by their incumbent competitors. But if new companies get the hiring credit, then existing companies are incentivized to create new wholly-owned subsidiaries in order to qualify for the tax break (while contracting employment in the parent company). Similarly, they are incentivized to outsource work to start-ups that get the credit.
Subscribe to the Tax Foundation Newsletter
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.