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The Schumer-Hatch jobs strategy

While the administration mucks about with spending freezes, Chuck Schumer and, surprisingly, Orrin Hatch have partnered on a proposal with some real job-creation merit:

We have an idea that is simple, straightforward and easy to explain and administer. In fact, it is so simple that the legislative text of the proposal is only a few pages long — a rarity when it comes to tax policy.

Here’s the idea: Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That’s it. Simple to understand, and easy to explain.

The beauty of this proposal goes beyond its simplicity. Unlike a jobs tax credit of a specific dollar amount, this credit is “front-loaded” in that it provides an incentive for businesses to hire workers earlier in the year — because the tax benefit will be greater. A $60,000 worker hired on Feb. 1 will save a business about $3,400 in taxes, while that same worker hired on May 1 will save it about $2,500.

Unlike some versions of a payroll-tax holiday, which provide a much bigger benefit for higher-paid workers, this proposal is not biased toward either low-wage or high-wage workers. Yes, if you pay people more, you save more in taxes — but the savings as a percentage of pay remains constant. Under this plan, a business saves 6.2 percent on both a $40,000 worker and a $90,000 worker.

You might say that saving $3,400 on a worker making $60,000 isn't saving very much. But you'd have said the same for a homeowner's tax credit that shaved $8,000 off the price of a $450,000 home. This proposals uses people's aversion to paying taxes, and their irrational joy at getting even small amounts of money for free, to put businesses in the mind-set that this is an uncommonly good time to hire workers.

By Ezra Klein  |  January 26, 2010; 9:44 AM ET
 
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Next: Surprise! We got you a spending freeze.

Comments

Would this encourage businesses to fire existing employees in order to replace them with new employees and save the tax?

Quite possibly.

Posted by: fuse | January 26, 2010 9:56 AM | Report abuse

At the margin, this will probably help.

Two questions:

Why is the cut off 60 days? Isn't that likely to guarantee that workers who have just been laid off are going to be unemployed for 2 months? In some cases qualifications will win out and the freshly unemployed guy will be able to find a job regardless of payroll tax, but for many this probably means that if you lose your job, you're not going to be working for at least 8 weeks.

Also, if this is only for 2010, what happens when it is 2011 and suddenly the worker now costs 6.2% more? I mean its all fine and well that more people will have jobs this year, but if the program goes away then so will a portion of these jobs, if cash for clunkers and the homebuyer tax credit are any guide.

While there might be some behavioral effect due to the effective price cut, I think that this post admits the problem is that labor costs are too high relative to nominal sales. I'm with Scott Sumner - jawbone the Fed into getting nominal GDP back onto a 5% growth path with the 2007 level of NGDP as the base year.

Posted by: justin84 | January 26, 2010 10:02 AM | Report abuse

That's a good point fuse. On the other hand, as Ezra says, it's really not that much money that the employer saves, so maybe they'll think that it's not worth having to train a new person to replace an experienced employee, but it *is* worth it to hire a new person to backfill some of the positions that have been sitting empty during the downturn.

I need a Krugman post on this.

Posted by: MosBen | January 26, 2010 10:02 AM | Report abuse

this is a very good START but it is just that a start. They need to do more to spur private job creation but this is very good and great that its bi-partisan. Oh and its very unlikely that it'll spur employees being fired to save 6% because the cost to train a new employee in most every industry would be at least that if not more. On the surface I can't see a bad side to this. Good start. Too bad it came almost a year later than it should have especially since its so simple.

Posted by: visionbrkr | January 26, 2010 10:02 AM | Report abuse

True .... the only thing about that though is that the homebuyer tax credit was appallingly BAD at stimulating actual spending, and was mostly just a give away. For some good econoblogging on the subject, take a look at calculatedriskblog. Don't know if this would be a good idea, but if the comparison to the homebuyer tax credit is any indication - it would be a really wasteful use of money.

Posted by: mmc20 | January 26, 2010 10:16 AM | Report abuse

"with spending cuts elsewhere in the budget between now and 2015"

Oh, good, we get our pony today, and we'll work out some way to pay for it within five years.

Posted by: KenInIL | January 26, 2010 10:23 AM | Report abuse

This is a good idea. We can disoute how much of an effect it will have, but in the big picture it will do more good than harm. As Ezra says, the actual $ impact won't be that great, so it'll be relatively easy to plug the hole by 2015. Plus the optics are fantastic. Three cheers all around, and I hope this gets fast tracked and maybe mentioned in the SOTU tmw night.

Posted by: Quant | January 26, 2010 10:43 AM | Report abuse

by which i mean "disagree about" of course.

Posted by: Quant | January 26, 2010 10:51 AM | Report abuse

Fuse - I didn't even think of that one.

In normal times I'd expect that the incentive to fire employees in order to pick up ones that will save you on payroll tax is pretty low - if you are happy with your employees, it is a bit risky to fire them in order to save money and hope that the new guys will be just as good as the old ones. That said, with all of the unemployed talent out there now, not only can you probably offer them a good deal less than what you are paying your existing employees, but your taxes go down as well. I'm not sure how many companies will respond this way, but the incentives for doing so are probably the strongest in this particular economic environment.

I'm not sure what I'd try from the fiscal side of things at this point. A lot of damage has already been done. Perhaps offer anyone unemployed for a year or longer the option to have unemployment benefits of 80% of their previous salary for up to 24 months if they commit to going back to school? That would help the long term unemployed with finances, job skills and resume repair (and the macroeconomy with recalculation). The only negative incentive that I see is people will stay unemployed in order to receive the higher benefits. Also we might need to get various schools to agree to accelerated enrollment schedules or else we'd be paying people for the better part of a year before they started their studies - and the benefits would probably runout midway through.

Posted by: justin84 | January 26, 2010 10:57 AM | Report abuse

Visionbkr - you're right. The incentive to fire current employees and hire new ones that pay a lower tax rate is probably pretty low due to training costs and the risk that the new guys don't work out. It's probably higher now than during normal times because not only is the tax rate lower, but the wage employers can offer is probably lower too. At the margin, I don't think this directly creates too much in the way of turnover.

However, this does reward companies for regular turnover - a guy leaves and then you fill his job (which you were going to do anyway) with a new guy, and rewards companies with higher turnover more. Isn't there a way to structure this via net changes in payroll? If a company has 100 workers now and has 110 from February to December, then they receive a tax credit for that incremental 10. If a company fires 10 workers and then hires 10 workers, they see no benefit, because they didn't create any net jobs. This introduces a bit more complexity to the program, but it only rewards companies which are actually adding jobs.

Posted by: justin84 | January 26, 2010 11:10 AM | Report abuse

If the cuts in the current bill are just "elsewhere in the budget", then I'm a little skeptical that this will actually end up being a short bill.

The tricky part will be cutting other people's priorities.

Posted by: zosima | January 26, 2010 12:24 PM | Report abuse

If the goal is to encourage corporations to hire, why not cut each corporation's corporate tax rate by a percentage relative to revenues, for each employee hired, up to a real 10% reduction? The stimulate economic growth would help offset the loss in revenues, and American already has one of the highest corporate tax rates in the world.

It also appeals strictly to the self-interest of the corporate entity. It becomes a huge tax benefit to hire folks and, ironically, the reduction in taxes paid gives them more money to hire with, and some of those companies would use the money save to hire new people.

Posted by: Kevin_Willis | January 26, 2010 12:48 PM | Report abuse

Would the employee have to pay the SS tax?

Posted by: NoVAHockey | January 26, 2010 12:59 PM | Report abuse

"The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That’s it. Simple to understand, and easy to explain."

Since that won't come out of Defense or Security, and since SS and Medicare are very hard to cut, where would Schumer & Hatch think those "cuts" are going to come from?

We know where Hatch would like to see them come from.

But perhaps Ezra can call Schumer's office and have him set out the most likely places this will come from.

I suspect that Schumer will be very vague because he knows where it would come from, and that would be programs that Dems like.

Folks need to know that "pay for it later" always means on the backs of middle class and poor oriented programs.

John

Posted by: toshiaki | January 26, 2010 1:28 PM | Report abuse

In response to justin84, the Job Creation Tax Credit that John Bishop and I wrote up for the Economic Policy Institute in October 2009 was only awarded for net increases in payroll. Our credit was also bigger: 15% for 2010, and 10% for 2011, on increases in payroll from the base period in 2009.

At a first guess, I would think that the proposal of Schumer and Hatch would create less than 40% as many jobs as the JCTC. First, the credit rate is lower, at 6.2% versus 15%. Second, the restriction to those unemployed more than 60 days makes it somewhat less attractive to employers.

Of course, the costs would also be lower than in our proposal, but I suspect that costs would not go down as fast as jobs created. There is a great deal of job churning in the U.S. economy. According to the Bureau of Labor Statistics JOLTS survey of labor turnover, the private sector had over 50 million hires in each year from 2001 to 2008. The number eligible for the Schumer-Hatch credit would be much lower, but the point is that there is a lot of gross hiring compared to net jobs expansion.

Bishop and I estimated the JCTC to have a cost per job created of $28,000. Most conventional fiscal stimulus proposals have costs of around $100,000 per job created. I suspect the Schumer and Hatch proposal is somewhere in between these numbers.

Tim Bartik

Posted by: bartik | January 26, 2010 1:44 PM | Report abuse

justin84,

I'm a small employer. This is nice and all but I'm not going to hire an employee yet (and i've been considering hiring one or two) unless I'm completely comfortable that I can keep that employee for a long enough period of time to make it worth my while because if I have to let him go there's unemployment, cobra, arra etc to worry about. Sorry but they need to do more and prove to me that the economy is better before I jump back in and hire. Everybody's different but that's my take.

Posted by: visionbrkr | January 26, 2010 1:53 PM | Report abuse

Senators Schumer and Hatch’s proposal is a good start, but it leaves out an important piece of the job creation machine – self-started jobs. With the joblessness of the current recovery continuing, more and more dislocated workers and low-income households will create their own jobs through self-employment. Even in a normal year, IRS reports over two million first-time unincorporated business filers. Even allowing for failures and part-time jobs, that’s a lot of FTEs, and in a recession, most expect these numbers to increase.
Interestingly, extending the Schumer-Hatch approach to support these enterprising new business start-ups would have two equally important, hidden but happy by-products. First, it would help fix the current badly broken tax law treatment of “first-time” unincorporated business filers. The current tax code slaps first-time business filers with a penalty for not paying estimated taxes in advance—never mind that knowing if and much your net profit will be in your first year of business is a near impossible task. Then the tax code blindsides these unsuspected entrepreneurs with the grim reality of demanding a four-figure lump sum payment for the whole previous year’s worth of Social Security and Medicare contributions. To add insult to injury, these self-help job-creators are required to pay twice- once as an employer and a second time as an employee. That’s 15+% of the business’s first year net profits – a very big chunk if you don’t see it coming!
But the second benefit is even more intriguing. Because of the unexpected tax penalties and Social Security liabilities, these first-time job creators are tempted, out of desperation and/or bad advice to not file as a way to maintain their business’s vulnerable cash flow. This is a slippery slope and a policy lose-lose. The first loss is the viability of the new job. The business owners, whose first new job is their own, cannot thrive in the non-compliant “informal” economy, and they inadvertently undermine their claim to Social Security benefits. The second loss is the fact that the resulting shortfall of Social Security contributions and tax revenues adds to the federal government’s “tax gap” (the difference between taxes owed paid), which the rest of us have to make up. In other words, a tax credit for the self-employed is likely to improve rates of voluntary tax compliance which could actually offset some of the costs of the credit.
Gene Severens
CFED/Self-Employment Tax Initiative

Posted by: Eseverens | January 26, 2010 2:52 PM | Report abuse

This is just another version of the classic Republican prescription of "take two tax cuts and call me in the morning".

Firse that this was tried in the 1970s and did not work. Why not? Because employers hire people because they think they have enough demand to think that they need more employees. Paying 6.5% of a new employees costs will not do enought towards making that employee profitable to have a significant impact on employment.

Second, it is to paid out of unspecified future spending cuts. Sure, and I have some stock in a bridge out of New York I want to talk to you about.

Third, the article starts by talking about how simple it will be to implement. But it ends up just starting to raise questions of how complex it will be to implement. I can think of plently of other complexities that the article does not bring up.

Finally, the right has been proposing cutting social security taxes for years. Obviously, their real objective is to increase the SS deficit so they can come back later and argue that SS payments have to be cut.

Do you have a single bit of evidence to contradict this argument?

Posted by: seerrees | January 26, 2010 3:23 PM | Report abuse

Visionbrkr,

I agree with your comments. I'm frankly pretty skeptical about these type of temporary stimulus measures having much of an effect, in particular the one proposed by Schumer and Hatch.

In my first post on this subject I mentioned that my prefered solution would be for the Fed to reflate nominal GDP so that it gets onto a 5% growth path with 2007 as the base year (in other words, $16-$17 trillion vs $14 trillion now). Commit to a growth path rather than a growth rate so that inflationary expectations don't take off and that underpeformance allows reflation.

Bartik,

Thanks for your comments. Your proposal makes more sense than the Schumer-Hatch strategy. As I mentioned to Visionbrkr, I am skeptical that one off tax credits work, but if you're going to try them I think it makes sense to go big and make it last for awhile. People in Vision's situation - as he already said is the case - might well see a 6.2% credit as insufficient to offset training costs the risk of having to fire that person later if the economy weakens, if they are unproductive or for that matter in 2011 when the credit goes away. A credit of 15% and then 10% the following year on incremental payroll is far better targeted towards net job creation and might be big enough and last long enough to move business owners to expand somewhat.

However, I also think that to truly be effective, the stimulus policy has to have an effect on expected sales growth - if a firm isn't forecasting any improvement in sales, then even a highly discounted employee isn't worth it if no extra production is required. Hopefully the existence of the large credit leads employers to think jobs will increase and their own sales will increase, thus justifying taking on a few new employees and taking advantage of the credit.

Posted by: justin84 | January 26, 2010 4:48 PM | Report abuse

On the surface this sounds good. But whats to prevent an employer from firing current employees and then hiring unemployed workers at a lower wage plus the benefit of the tax credit?

Posted by: michaelkad | January 27, 2010 7:45 AM | Report abuse

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