Small Business Tax Credits Won’t Create Jobs

The jobs numbers were lousy (as we predicted). The Administration’s solution is small business tax cuts. While this is a good idea in the long haul, it is not a solution to the short-term problem. Simple logic says you don’t hire a worker or invest in a piece of equipment that doesn’t pay for itself. Economists teach this.

The top problem faced by small business owners today according to the National Federation of Independent Business is “weak sales” (not credit availability). Translation: new workers can’t produce enough sales to cover the cost of hiring them. New equipment can produce more output, but it can’t be sold, so capital spending projects wont pay for themselves. Thus, hiring or buying new productive capacity would produce lower profits as the cost would exceed the revenue generated.

So, the basic problem is that resources can’t produce sufficient income to pay for themselves. This is true no matter how it is financed.

1. Tax cuts may give the firms more cash, but why would they spend it on employees or equipment that won’t pay for itself? These “gifts” will still be invested only when the prospect of a payoff is good. It would be crazy to do otherwise.

2. Job tax subsidies make an employee cheaper for a short period but again the employee must be able to generate enough income to pay their way or the firm loses more money.

3. How about interest-free loans? Nope, since the money must be repaid, why invest it in losing endeavors?

The Administration doesn’t understand basic business and the nature of the problems faced by owners. Consequently it designs “stimulus” programs that are counter-productive and wasteful of taxpayer money.

Short-term Tax Incentives Don’t Work

Congress has undertaken a series of attempts to stimulate consumer spending by providing tax breaks for actions taken before a certain date. First came the $8,000 tax credit for buying a new home. This was followed by “Cash for Clunkers”. And now Congress is contemplating a tax credit for hiring new workers. And there may be more ill-conceived plans to entice the consumer to spend more. It was, after all, a sharp decline in consumer spending that led us into a deep recession.

There are several important facts of life to recognize in evaluating these schemes. First, none of these plans will get someone to buy a house, buy a new car or hire an employee that wasn’t going to do so anyway in the time period close to the passage of the program. No one spends $200,000 on a house just to collect $8,000, a small percentage of the house price. The same was true for Cash for Clunkers. It is very likely that all consumers who participated in the program would have purchased a vehicle in the proximate time period without the program. All these programs did was to pull future demand into the current period, reducing future demand, a fact revealed by the precipitous decline in home purchases once the credit ended. Bottom line, the two programs were just gifts from taxpayers to consumers who would have made purchases anyway.

A proposed $5,000 tax credit for hiring a new employee will have the same result. No business will spend a salary of $30,000 or $40,000 or whatever to get a $5,000 credit which lasts only a short period of time, leaving the firm to pay the full cost in the future. Once again, such a program would just be a gift from taxpayers to firms that would have hired anyway. It will rearrange the pattern of hiring, but not increase it.

The most recent report on housing starts indicated that little was happening there. In a normal year, we would build over one and a half million new housing units. Current starts are under 600,000, because over 10 percent of all housing units are still vacant. Housing will come back, but slowly, and this is one reason why the recovery from the recession will be slower than hoped for.

Taxing the Rich Didn’t Work for Clinton Either

Note from Jim:  Welcome to my good friend and guest blogger, Bill Dunkelberg.  You can find Bill’s bio and photo on the same web page that has my bio and photo.  From now on, note the blogger’s name under each blog’s title.  Thanks for reading!  Jim

Many commentators including a well known governor recently defended the proposal to tax rich people more by suggesting that Clinton’s tax hike resulted in budget surpluses and strong economic growth.  It doesn’t take an economist to recognize the absurdity of that statement.

Yes, taxes were raised on the rich by a Democratic Congress.  Then the Democrats were thrown out.  Fiscal conservatives gained control, which helped control spending.  The “politics” of the deficit were negative and the Congressional Budget Office predicted huge deficits through 2000.  But several events that are not likely to repeat in many lifetimes took over.  Most important was “Y2K”, a fear that anything with a chip would fail as the calendar clicked over to 2000.   This produced a huge surge in tech spending which was accompanied by a telecom boom (fiber optics etc.) that drove employment to a record high 64.5% of the adult population.  This had nothing to do with raising taxes on the rich, but since economic growth was so strong, tax revenues came in much stronger than anticipated and several years of budget surpluses occurred (if Congress knew the revenue was coming, it would have spent it!).

Unfortunately all of this came to an end in the last half of 2000 while Clinton was still president.  The budget surpluses would have occurred without the tax hike, but were probably larger because of it.  A major share of the surpluses was due to capital gains taxes in the best years, unfortunately not a tax on productive income generation.  It was just another big redistribution of wealth, for every winner, a loser with government taking a slice along the way.

So, unless the Democrats claim that they engineered the Y2K calendar event and the emergence of the internet (well, a few do take credit for this) and the telecom communications boom, it is time to recognize that the surpluses were a result of Schumpeterian investment shocks, not Clinton tax policy.  Stop these nonsensical claims and get back to the basics. It’s the private sector that creates wealth, not government and taxing working people will not enhance the recovery.