Businesses (and Micro) Refute the Logic of Jobs Tax Credits

I wrote a few days ago about how I found the President’s American Jobs Act proposal to be less than stimulating and I updated my assessment yesterday.

Much of the proposal involves a lot of complex tax credit ideas that are supposed to provide the incentives for businesses to hire.  The idea is that if a $5000 or so tax credit is dangled in front of businesses, they’ll decide to part with some of the cash they are sitting on and hire.  It’s a dubious idea.  But it’s straight out of the conservative-thinking playbook. See this post for an explanation of the economic theories and thinking behind different types of jobs proposal. The conservative view and theories emphasive the supply-side. They posit that all can be fixed by providing greater financial incentives to businesses and that any form of tax is a disincentive.  The fact that President Obama has embraced these types of proposals is additional evidence, that contrary to the accusations that he’s a socialist or liberal, he is, in fact, quite conservative in his views.  He simply isn’t as conservative as the far-conservative/liberatarian wing of the Republican party would like.

There’s little historical evidence to suggest that tax credits for new hiring is a powerful incentive.  What I’ve always found interesting is that the economists and conservatives who propose these ideas claim that the theory underlying it is based on microeconomics – the idea that firms want to maximize profits.  But, in fact, it ignores basic microeconomic thinking about where profits come from.  Profits come from first selling something.  It makes no difference what your taxes are if you aren’t selling enough.  This is another reason why I think the idea of tax credits for new hiring will be a weak and relatively ineffective way of stimulating employment. It’s an expensive way to not get much results.  What really we need is an economy that spends more money.

To bolster my case, we can read about the reaction from many businesspeople in the New York Times:

The dismal state of the economy is the main reason many companies are reluctant to hire workers, and few executives are saying that President Obama’s jobs plan — while welcome — will change their minds any time soon.

That sentiment was echoed across numerous industries by executives in companies big and small on Friday….[M]any employers dismissed the notion that any particular tax break or incentive would be persuasive. Instead, they said they tended to hire more workers or expand when the economy improved.

Companies are focused on jittery consumer confidence, an unstable stock market, perceived obstacles to business expansion like government regulation and, above all, swings in demand for their products.

“You still need to have the business need to hire,” said Jeffery Braverman, owner of Nutsonline, an e-commerce company in Cranford, N.J., that sells nuts and dried fruit. While a $4,000 credit could offset the cost of the company’s lowest-cost health insurance plan, he said, it would not spur him to hire someone. “Business demand is what drives hiring,” he said.

On the other hand, creating lots of tax credits and tax code complexity will create some additional jobs and hours worked in one particular sector:  tax accountants and laywers.

In Michigan, Governor Snyder Is Increasing Unemployment

For years and through the early part of the Great Recession of 2007-09, Michigan was ground zero for unemployment. Unemployment rates of around 15% – worst in the nation.  But once the GM and Chrysler completed their bankruptcies, it has begun to emerge. In the past 12 months Michigan has made relatively good progress on it’s unemployment problem.  In fact, it’s made the most progress of any state (a low bar, I know) while some states like Nevada and California and two other states are worse.  To the extent a governor is responsible for unemployment in the state, this must be accredited to Jennifer Granholm who left office in January 2011.

The new governor, Rick Snyder, came in full of Republican talk and promise of “creating good jobs”.  He’s been extremely vague about this happens other than to wave the magic business tax-cut genie.  Apparently, according to Snyder, if we simple cut business taxes by raising taxes on seniors and poor people, then the jobs will just happen.  Now there’s plenty of evidence indicating this idea simply doesn’t work.  Taxes are not the major reason why businesses are where they are.  More importantly, no business ever said “hey, my taxes were cut so I’ll be a good citizen and hire somebody”.  What real businesses do is they say “hey, there’s demand for my product, I better hire somebody”.

Unfortunately Snyder is not content to simply cut business taxes.  He has to tinker with a proven job-creation system based on tax credits for the film industry.  How this tax credits for a film industry are different from general business tax cuts is because they are focused on creating the initial infrastructure or economic “eco-system” that causes a significant industry to concentrated in one area.  Creating the basic infrastructure and network of start-up firms concentrated in a particular industry is critical.  It’s how giant industries grow.  It’s the dynamic that created Silicon Valley.  Heck, it’s the dyanamic that created Detroit and Michigan as the center of the auto industry 100 years ago.

We’re backtracking now.  From The Detroit News: http://detnews.com/article/20110511/BIZ/105110359/Michigan’s-film-studios-go-to-fade-out#ixzz1M6IMlJeh

Michigan’s fledgling film studio infrastructure is crumbling as the number of productions declines in the wake of a $25 million limit on state cash incentives for movies, television shows and digital media.

Livonia-based Maxsar Digital Studios, which opened a week before Gov. Rick Snyder announced in mid-February that he wanted to cut and cap the nation’s most generous film and television industry tax incentives, has laid off its 50 employees and idled all productions.

A west Michigan facility known as 10 West Studio has lost two potential film deals, and one of its principal founders has relocated to Los Angeles.

Another studio operated by S3 Entertainment Group in Ferndale was evicted from a Madison Heights location earlier this year for failure to pay rent.

“We don’t have a sufficient industry to support an infrastructure at the $25 million cap,” said Jeff Spilman, founder and managing director of S3 Entertainment Group, referring to Snyder’s plan, which the state Film Office has adopted but the Legislature has yet to approve.

“Everyone who has had the capacity to leave has pretty much left,” Spilman said.

Having government plant the seeds, build the infrastructure, or even fund a young industry is an old and proven tactic for industrial growth.  It worked for railroads, the telegraph, electricity, computers, software, airlines, aircraft, pharmaceuticals, and many others.  Snyder is abandoning what’s proven to work for a magical belief in a genie.

I still expect some gradual improvement in Michigan unemployment, but that’s largely because our good old standby, the auto industry, is recovering and gaining ground.  Unfortunately that leaves Michigan just as dependent on one industry as we were before.