Posts Tagged ‘Enis’

Tax Credits for Hire

Monday, October 12th, 2009

An editorial in today’s Wall Street Journal takes aim at proposals floating in Washington to offer tax credits to firms that hire new empoyees. “One plan would grant a $3,000 tax credit to employers for each new hire in 2010,” according to the editorial. ”Under another, two-year plan, employers would receive a credit in the first year equal to 15.3 percent of the cost of adding a new worker, an amount that would be reduced to 10.2 percent in the second year and then phased out entirely.”

Smeal’s Charles Enis argues that these tax incentives, which were tried once in the late 1970s resulting in mixed reviews, are unfair to firms who resisted layoffs during the recession, essentially punishing them for keeping their employees working. By making the tax code even more complicated, however, the tax credits will likely succeed in creating some jobs—in tax accounting.

More from Enis:

Imagine buying a car and learning that you could have made the purchase a week later and received a generous rebate. Firms that resisted layoffs may have a similar sentiment if one of the proposed credits is enacted. These credits reward firms that increase the size of their workforce or add significant hours of work. Firms that laid off many workers will likely increase their hiring when the economy improves and thus benefit from the credit. What about firms that absorbed the cost of keeping excess people? What do they get?

The income tax regime is one of many policy tools available to combat economic difficulties. However, the tax code has been summoned to remedy virtually all of our problems (e.g., pollution, health care, energy, etc.). These well intentioned provisions have contributed to the complexity of a tax system described as “a national disgrace” as far back as President Carter.

The tax system as a policy tool raises cost-benefit dilemmas. Straightforward provisions result in benefits to unintended taxpayers at substantial costs to the Treasury relative to the economic goals achieved. Provisions targeted toward intended taxpayers must be laden with many complex features (e.g., phase-outs, caps, restrictions, uncertainties regarding extensions, etc.). Such features frustrate small businesses, which are important job creators. The jobs credit that was enacted for 1977-1978 had a mathematical specification too complex to explain in this short blog post. The former credit was tied to the federal unemployment tax regime, while the proposed credit is tied to the Social Security tax regime, and is likely to be even more complex after it is “tweaked” by political compromises.   

Whether the ’77-‘78 jobs credit was successful depends more on one’s political perspective then on evidence from rigorous economic analyses. The complexity and poor promotion of the ’77-’78 credit rendered the findings of traditional analyses tenuous and mixed. Economists believe that the new hires from the ’77-’78 credit were largely lower-skilled workers, which is not a bad thing. However, the tax code already contains the Work Opportunity Tax Credit, a provision aimed at encouraging businesses to hire individuals who are disadvantaged in the labor market. Is another credit really necessary or can the existing credit be updated?

The enactment of the proposed jobs credit will significantly increase the hours of work for tax practitioners, IRS personnel, tax form printers, HR departments, software writers, and hopefully many otherwise unemployed Americans.

Tags: Economic Crisis, Economy, Enis, Politics, Taxes, Unemployment
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The Tax Code Review

Wednesday, April 1st, 2009

President Obama last week appointed former Fed chair Paul Volcker to oversee a review of the federal tax code aimed at finding ways to make it simpler, fairer, and more efficient, while also closing loopholes and increasing revenues. According to Smeal’s Charles Enis, we’ve seen this before:

In the words of Yogi Berra, “It’s like déjà-vu, all over again.” The belief that our income tax regime was unfair, inefficient, and too complex prompted President Reagan in his 1984 State of the Union address to announce that he would commission the Treasury Department to propose a comprehensive tax reform for fairness, simplicity, and economic growth. Despite these efforts, these flaws have persisted over the last 25 years.

Two of Obama’s goals are to find ways to simplify the tax code and protect progressivity. These goals often conflict. For example, many tax breaks are targeted at lower and/or middle income groups to make them progressive. This targeting requires the benefits to be phased out based on income. Phase-outs and the alternative minimum tax contribute to the tax law’s complexity and poor transparency. One’s additional income may not only be subject to tax, but can also result in lost tax benefits that are subject to phase-outs. Such benefits include the child tax credit, earned income tax credit, IRA deduction, tax-free Social Security benefits, exemption allowances, etc. Thus, marginal tax rates in effect tend to be greater than those specified in the tax code. Phase-outs affect all income levels, as there are more than 25 such provisions in the code.

President Obama has proposed restricting certain deductions for high-bracketed taxpayers to keep taxes at 28 cents on the dollar. This idea would increase progressivity. However, having different tax rates for deductions and those that apply to income does not increase simplicity.

Significant items in the code expire at the end of 2010, including many of those recently enacted as part of the stimulus package. Predicting what our tax regime will be in 2011 at this point would be pure speculation given the president’s ambitious agenda, and the many compromises necessary to get a major tax reform through the legislative process. Nevertheless, I am confident that the code will not be simpler. In short, the income tax will turn into a pumpkin—a type of squash.

Tags: Accounting, Enis, Politics, Taxes
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