As President Obama continues campaigning for yet another round of stimulus it appears now that even democrats are beginning to question the soundness of this strategy. This new focus includes a $5,000 tax credit—among other items— for any business that hires a new worker—effective the year the legislation is passed. Of course, the intended effect of this new policy may win some political points for the President and legislators, yet this effect does not override the fact that this maneuver is simply bad economic policy.
Creating a tax credit for hiring new workers will not create an incentive for already-struggling companies to begin hiring—which is the overall intent of this policy. This could even result in some currently unemployed individuals remaining unemployed until the tax credit is passed into law, or similarly, some companies firing some workers and then re-hiring once the tax credit is passed into law.
Businesses are not making the decision to not hire—or lay off current workers—because they simply want to keep their workforce smaller. Instead, as a result of depressed demand during the recession, companies are continuing to face lower sales and overall revenues. Most companies—particularly small- and medium-sized companies—are making these employment decisions to shore up on costs to survive during the recession. As an example, if a company determines that a worker is too costly to employ at $25,000, that worker will remain costly at $20,000, especially when there is no new work for the company. This is holds for a business of any size.
Business owners want to see the economy rebound so that they can begin productively employing more workers. However, the net effect of this tax-credit-for-hire policy—given the mix of other mandate costs and regulations companies stand to face with potential federal legislation—could turn out to be negative.
Federal health care reform policy is still alive, including punitive employer mandate costs that have been attached to these bills and expanded Medicare payroll taxes. The estate tax—which is a significant drag on American family-owned businesses—has not been permanently repealed and new energy taxes as part of proposed federal cap-and-trade legislation still loom. This is in addition to the other tax cuts and reductions that expired December 31, 2009 all of which provide incentives for small and medium-sized businesses to grow and productively employ workers.
To get companies of all sizes to productively hire more workers—and encourage entrepreneurs to bring new innovative and productive ideas to the economy—President Obama and federal legislators should re-focus their efforts on tinkering with economic policies that actually create the incentives for companies to form, innovate, and productively expand .