In the following Q&A, John Bishop, associate professor of human resource studies in the ILR School, discusses a job creation tax credit proposal he and Tim J. Bartik of the W.E. Upjohn Institute for Employment Research have written. Since the proposal was presented Oct. 20 at the Economic Policy Institute in Washington, D.C., Bishop has been interviewed by CNN, CNBC and The New York Times.
If enacted, what would this proposal accomplish?
It will leverage hundreds of billions of dollars of private resources and the vision and skills of 6.5 million employers and millions of aspiring entrepreneurs in the task of ending the plague of American joblessness.
What sizes and types of businesses would be eligible for the tax credit?
All sizes. All types. Every employer who withholds Social Security contributions for employees is eligible, including nonprofits, state and local government entities and for-profit businesses and partnerships.
How many businesses would be affected?
We expect more than 4 million businesses will grow their payroll enough to receive a job creation tax credit in 2010. In 2011, we expect 5 million enterprises to get the tax credit.
How would businesses receive a tax credit incentive?
Firms that increase employment or hours worked in 2010 would get a 15 percent tax credit on the increase in their wage bill over its 2009 level. In 2011, the tax credit would be reduced to 10 percent. New employers would receive the 15 or 10 percent tax credit on every new hire.
What role does government play?
The government's only role is to lower the marginal cost of labor. The entrepreneur decides on the purpose of the firm's expansion, who is hired, what employees do and provides the training and supervision. The entrepreneur pays 85 percent or more of the labor costs, so we can be confident the new hires will be productively employed.
How many jobs would be generated?
Based on a review of 50 years of econometric research on the demand for labor, we expect the credit to add over 5 million full-time jobs to the U.S. economy during the next two years at a net federal cost of between $5,000 and $6,000 per additional full-time equivalent employee. During the 1977-78 national job tax credit program, private employment rose 11.1 percent, the biggest two-year increase in the past 50 years. The credit also improves the cash flow of fast-growing firms, which helps them finance the costs of expansions they shelved last year when bank credit became unavailable.
Why would the tax credit work?
The tax credit lowers the cost of having American workers provide a service or make a product. This will help American manufacturers increase exports and compete against foreign suppliers and offshore call centers. It also encourages firms to improve the quality of the services they provide by improving training and hiring more skilled staff.
It gives millions of entrepreneurs a limited-time offer to invest in their company's future by training staff, entering new markets and bringing new products and services to market at a 15 percent discount. Radically decentralizing decisions to 6.5 million employers will result in a rapid response to the large temporary reduction in the cost of labor.
What impact would the tax credit have on consumers?
Studies found that the 1977-78 national job tax credit program induced reduction in the marginal costs labor were partially passed on to customers in the form of discounts and lower prices. This provides an important second round of benefits for American consumers.