Obama's Jobs Proposal

Obama recently proposed a small business jobs and wages tax cut as part of his campaign to increase job creation, and aid the economic recovery. The proposal has three key aspects:

1. Businesses will receive $5,000 for every net employee they hire in 2010. This credit is capped at $500,000 per firm to ensure small businesses receive the majority of the credit.

2. Businesses that increase wages and hours for existing workers will be reimbursed for the Social Security payroll taxes they pay on wage increases above inflation. This credit does not apply to wage increases above $106,800.

3. Companies can claim these credits on a quarterly basis.

This is a purely supply-side stimulus proposal, meaning, these tax credits will have no affect on the underlying demand for the products of these businesses. In other words, while facing the same level of demand, and therefore revenues, firms must increase their costs in order to take advantage of this tax credit. Ergo, the firms best-placed to take advantage of these tax credits are those firms that are already recovering and already thinking about adding new workers or increasing wages. While firms on the margin deciding whether or not to add a worker or increase wages will also be impacted, firms struggling the most will be unaffected by this subsidy as they have no room for any increases in costs.

I believe this proposal is largely a political maneuver, and will prove futile in creating the amount of new jobs alluded to in the administration's rhetoric. By targeting already rebounding businesses, the administration simply piggy-backs their recovery and will probably attribute these business' recovery to this subsidy in the future. Indeed, this subsidy will create some jobs on the margins, but many of the jobs that will be attributed to this subsidy would have been created without this subsidy. In addition, when tampering with the tax code, one must always consider the skewed incentives. This subsidy is no exception. Individuals currently working for a struggling businesses will have an incentive to quit their jobs and move to companies that are positioned to take advantage of the subsidy, and thus receive higher wages. This can hardly be considered job creation. This proposal, while not overly harmful to labor markets, will ultimately prove impotent at its goal of job creation.