How to Create More Jobs

This is the big question looming in Washington, on Wall Street, on Main Street, and in neighborhoods throughout the country. Everyone wants job creation; and President Obama said so in his State of the Union Address, but many disagree on how to get this done.

In the past, small businesses (under 500 employees) have been the main job creation engine, responsible for more than 60% of all new jobs. This action has not occurred as we come out of the recession.

Payroll tax cut
Sen. Schumer (D-NY) and Sen. Hatch (R-Utah) have proposed (in an OpEd piece in the New York Times)  a payroll tax cut for any employer who hires a worker who has been unemployed for at least 60 days. The credit would be a waiver of the Social Security portion of FICA (6.2% of wages paid in 2010 up to $106,800). An additional $1,000 credit would apply if the worker remained on the payroll for at least 52 weeks. This proposal has considerable appeal:

There’s an immediate tax benefit to employers—rather than waiting to file an income tax return to claim some job-creation deduction or credit, this payroll tax cut is reflected in a reduction in payroll tax deposits.

• There’s no cap—the more workers hired, the greater the tax savings.
• The incentive grows with quick action—a worker earning $50,000 annually who is hired on February 1 would save about $2,800 in payroll taxes; if the hiring doesn’t take place until July 1, the savings are only $1,550.
• It’s easy to compute—it is 6.5% of wages; there is no cap on who is hired, so it applies to management (up to the Social Security wage base of $106,800) as well as rank-and-file employees.

Other tax incentives
The temporary payroll cut isn’t the only tax incentive job creation. President Obama has indicated support for tax credits for small businesses that hire new workers.  Specific proposals include:

• A tax credit of 15% of payroll increases in 2010 versus 2009 (and a 10% credit for increases in 2011 versus 2010). The credit would apply for adding people to the payroll as well as increasing hours or wages.
• A 20% tax credit for small employers (fewer than 100 employees) for year-over-year payroll increases; a 15% credit would apply to larger employers.

These incentives require considerable calculations and only benefit profitable companies (you need to owe tax in order to use a tax credit to offset the tax).

Bottom line
Tax incentives for job creation may be useful, but are probably not as a strong an incentive as overall economic recovery. Small businesses will start to create jobs when sales increase (consumer confidence must rise and the unemployment rate must fall for this to happen). Still, a payroll tax cut would be a better tax incentive than a deduction or tax credit.

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