The effect of job tax credits

Date posted: October 27, 2011

One way the government can try to stimulate job creation is through the tax code by providing businesses hiring new workers with one-time tax credits. N.C. State University economist Mike Walden reviews what research studies have to say about how well this actually works.

“Unfortunately, it’s not very good. … What you often hear in these proposals is for a one-time tax benefit to the employer, and maybe this one-time benefit will be $5,000. That is … , this employer gets to reduce their taxes by $5,000 if they add a job. The problem is that when an employer adds a job, they’re not just looking at this year — they’re looking at many, many years down the road. And when you factor in the value of that one-time tax credit — $5,000 — it may be at most only 5 or 10 percent or less of the multi-year cost of that employee.

“So, what serious studies have concluded is that tax credits aren’t a very efficient way of encouraging businesses to employ people, simply because when you look at the wide scope of the cost of employing someone, that tax credit isn’t really saving that business very much. And if you really did want to use the tax credit, you would have to make it for multiple years. And of course when you do that, the downside is it increases the cost to the government by a very large factor.”

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