Tuesday, September 6, 2011

NY Dealbook: The Fallacy Behind Tax Holidays

Great piece in NYDealbook by Sorkin on the hot wind blowing around D.C. the past few years.... and to return Thursday.   It's about the economy demand stupid!  If it was about absolute tax levels, by this point we should be creating 400K+ jobs a month with a 5%+ GDP! [May 6, 2011: US Tax Burden at Lowest Levels Since 1958]  The tax cuts of 2001 and 2003 should have set off a never before seen hiring binge - instead we got jobless recoveries (ex real estate bubble).  We continue to look for results from band aids at the margin (and expensive ones at that) instead of first admitting - and then addressing - our structural issues!

If there is a demand for a said product or service, in which they can hopefully generate a profit- employers will form companies and/or hire.  If not - they won't.   It's not that complicated.

Via NYDealbook:

  • As President Obama confronts the nation’s dismal unemployment problem — stubbornly stuck at 9.1 percent with, shockingly, zero net jobs created in August — Wall Street and corporate America are working behind the scenes in Washington to push for a series of temporary tax breaks, which they insist will help create jobs.
  • Consider it a form of horse trading — tax cuts for jobs. There is only one small problem with this strategy: temporary tax cuts rarely result in new jobs and always result in less tax revenue.
  • “Tax policy is not a great lever for adjusting short-term growth,” explained Howard Gleckman, a resident fellow at the Tax Policy Center , who has reviewed dozens of studies on the subject. Most temporary tax holidays “reward people for what they are going to do anyway,” he said, adding that “the bang for the buck is very low — you’re subsidizing companies that were already going to hire.”
  • A seminal study by John H. Bishop and Mark Montgomery that looked at the Targeted Jobs Tax Credit bill from 1977, which was aimed at temporarily giving employers an incentive to hire disadvantaged workers, showed that “at least 70 percent of the tax credits were claimed for hiring workers who would have been hired even in the absence of the tax credit.” Companies claimed more than $4.5 billion in credits as a result.
  • That is not to suggest that tax policy cannot help with long-term growth — virtually every academic study says it absolutely can — but that tax policy is a lousy way to stimulate the economy on a temporary basis.
  • Let’s be honest, even if it is an uncomfortable truth: The jobs crisis is not really a function of tax policy; it is a function of economics. Right now, there is too little demand for products.
  • R. David McLean, a visiting assistant professor of finance at the MIT Sloan School of Management, published a new study last week that showed companies were sitting on trillion-dollar piles of cash, not because they are hoarders or greedy, but because they are worried about the economy and that their businesses might not be as strong as they hope in the future.
  • Devising short-term tax incentives is the antithesis of creating long-term certainty — sticking to the rules of the game. Indeed, such holidays can create perverse incentives. The debate over a tax break for companies to repatriate cash from overseas, for example, has already created a new moral hazard of sorts. When Congress provided a one-time tax break in 2004 for this purpose, it said such a holiday should never be repeated.  “If Congress enacts a second tax holiday, rational corporate executives will conclude that more tax holidays are likely in the future,” Chuck Marr and Brian Highsmith of the Center on Budget and Policy Priorities recently wrote. “That will make corporations more inclined to shift income into tax havens and less likely to make investments in the United States.”  (and bingo was his name-o!)
  • One of the other ideas floating around is a temporary break on payroll taxes for employers — in addition to extending the current payroll tax holiday for employees past Jan. 1. The tax holiday for employees may make some sense: it provides extra cash directly to workers, who may put it back into the economy by spending it. A payroll tax holiday for employers is a different story. It would lower the 6.2 percent tax they pay on the wages of every worker they employ, in the hope that this would give them an incentive to hire workers.
  • But again, there is that little problem with demand. “Every C.E.O. and C.F.O. will tell you they will only hire when they are confident they can get sales,” Mr. Gleckman said. “They say to themselves, ‘How much can we sell with the workers we have?’ But there’s nothing a C.E.O. hates more than not being able to fill an order. Only then will they hire.”

[May 1, 2011: Will Repatriation of Foreign Earnings at Ultra Low Tax Rates Create U.S. Jobs? Not if 2004 is an Example]

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