Tuesday, February 16, 2010

The Real Affect Of Obama’s Proposed $5,000 Tax Credit To Small Business For Hiring New Employees …. Don’t Be Fooled

In a down economy, where many businesses are having difficulty staying open -- much less generate a profit -- does a tax credit like this have any real and sustainable impact on generating new, incremental jobs?

If you sit back … separate rhetoric from reality … you should easily arrive at the true answer to this question.


This is just another example of the Obama Administration feeling they have to do something, and something that will "appear" to be successful.

By proposing a tax credit for hiring, the government is actually distorting the market, and shrewd small business owners will wait for the distortion to resolve (either by the tax credit's being made permanent or discontinued) ….. before making such relatively significant financial commitments as hiring a new employee.

But it’s much more complicated than that. Dig deeper.

This just doesn’t pass the sniff test. Further … it’s an obvious irresponsible use of funds.

Are there any countermeasures to ensure the employee stays working for a determined amount of time? If I were an unethical employer, I could hire people just to get the tax credit and then tell them that some contract didn't go through and I don't need them anymore. I would also likely hire at the entry level …. Much cheaper and still gets me the same tax “credit”. So under that scenario what happens to all those skilled, experienced, well trained but unemployed fellow Americans out there? Nothing …. Still no job for them.

I didn't do anything to lower the real unemployment rate. I just lowered my tax exposure. I agree it's great to have incentives to try to boost the economy, but without certain guidelines, it allows unethical people to take advantage of things without obtaining the intended result.

It’s also important to note that more than likely it is going to cost the small business way more than $5000 to find, hire, train and then pay a new employee. With the economy in the state it’s in … this would amount to more money going “out” at a time when not enough is coming “in”.

My biggest fear is that the US will throw 33 billion at this program and it will generate jobs on paper ….. but not affect the overall employment rates much. Not unlike the Cash for Clunkers program. The Obama administration itself is concerned about being able to tell the difference between a true new hire and the constant fire / rehire that normally goes on.

The Obama administration, for its part, acknowledges that it does not expect perfection. “Even if only a small portion of the total jobs that are being rewarded by this tax credit were created because of this tax credit, you have still created an enormous number of jobs. It’s not just designed to help small business create jobs, it’s also designed to reward higher wages, good jobs, and just generally cut taxes for small businesses at a hard time for this sector.”

The above is taken from a NY Times article dated 1/29.

Friends I’ve spoken to who are small business owners ALL say no, this wouldn't prompt them to add a new employee they wouldn't otherwise add. But like the Cash for Clunkers, if they were considering hiring, they may delay the hire (if possible) until the program was approved to make sure they get the benefit.

I simply don't see this “tax credit” as an incentive to hire (unless you already were planning on hiring). The only thing that will really drive hiring is increased demand for products (or services). Until we stimulate demand for goods and services, why would anyone add people? Absurd. This is the type of logic that comes from those who have no real world work experience. Any small business owner will tell you the same thing - "I can't afford to hire someone until my sales increase enough to justify their wages".

Businesses need stability for medium and long term planning before they'll hire. Credits are short term solutions. When the current administration vilifies business and profit, it sends the message that it's best to hunker down and maintain cash flow. Until the administration acts like it wants to partner with business, both large and small, in creating sustained and long term economic growth based on free markets, there is a substantial disincentive to growth and hiring.

For those of us who live and build small businesses in the real world, we see this for what it is - politics.

Instead …. Why not advocate for a payroll tax moratorium. A reduction or elimination of payroll taxes for a window of time would give every single small business in the US (that employs people) immediate access to capital to either hire directly or reinvest into growth - which in turn will lead to hiring at other firms.

A $5,000 tax credit for hiring someone is like offering a $5 rebate for the purchase of at $2,000 flat screen TV. I'm just not motivated by the $5 rebate even though I would love to have the TV.