The Propsed $5K tax credit

[jjamie12]

Re-posting from a different thread:

 

Magox said: "Estimates range that one out of every ten new hirees will be cause of the $5000 tax credit."

Great!

Assume:

Five year time horizon

Cost of funds for gov't (5 yr) @ 2.23%

Average unemployment benefit is $292 for 46 weeks (because of new laws put in place during times of financial strife... I think the normal time frame is 26 weeks)

Average real federal tax rate of 20.7%

Average salary: $32,140

 

To break even on the $5K: 11.421% of the 'stimulus' jobs created would have to have been ONLY because of the $5K. That is very close to the 1 in 10 Magox quoted earlier. So, if 'estimates' are off by 10% (ie. 2 out of every 10 jobs are solely based on the $5K stimulus): NPV for the gov't: $4,289.

 

This doesn't even take into account other good things (I wouldn't even really know how to estimate this impact) associated with having people employed like: Having them spending money on LA's widgets, or having them pay into state and local taxes or keeping them in their home instead of going to foreclosure or or or (you get the point)

 

(Note: I got the assumptions from the first links I opened from Googling "Average Taxes Paid in the US" and "Average Salary US" and "Average unemployment benefits". I did, literally, zero fact checking, so you may quibble with the numbers somewhat, but I think the essential point still stands up if you want to change some of the assumptions)

 

It would appear that there is, at the very least, a decent argument to be made (strictly from the revenue side) that a $5K tax credit for small businesses per hire *might* make some sense. I'm not totally sure. I'm looking at these numbers and I think it probably does, but I haven't truly formed an opinion because I'm quite sure that I'm missing some things. Is there anything else to consider in these numbers? Any other numbers we should use? Different time horizon? Salaries? Tax Rates? Let's discuss this.

[Magox]

Re-posting from a different thread:

 

Magox said: "Estimates range that one out of every ten new hirees will be cause of the $5000 tax credit."

Great!

Assume:

Five year time horizon

Cost of funds for gov't (5 yr) @ 2.23%

Average unemployment benefit is $292 for 46 weeks (because of new laws put in place during times of financial strife... I think the normal time frame is 26 weeks)

Average real federal tax rate of 20.7%

Average salary: $32,140

 

To break even on the $5K: 11.421% of the 'stimulus' jobs created would have to have been ONLY because of the $5K. That is very close to the 1 in 10 Magox quoted earlier. So, if 'estimates' are off by 10% (ie. 2 out of every 10 jobs are solely based on the $5K stimulus): NPV for the gov't: $4,289.

 

This doesn't even take into account other good things (I wouldn't even really know how to estimate this impact) associated with having people employed like: Having them spending money on LA's widgets, or having them pay into state and local taxes or keeping them in their home instead of going to foreclosure or or or (you get the point)

 

(Note: I got the assumptions from the first links I opened from Googling "Average Taxes Paid in the US" and "Average Salary US" and "Average unemployment benefits". I did, literally, zero fact checking, so you may quibble with the numbers somewhat, but I think the essential point still stands up if you want to change some of the assumptions)

 

It would appear that there is, at the very least, a decent argument to be made (strictly from the revenue side) that a $5K tax credit for small businesses per hire *might* make some sense. I'm not totally sure. I'm looking at these numbers and I think it probably does, but I haven't truly formed an opinion because I'm quite sure that I'm missing some things. Is there anything else to consider in these numbers? Any other numbers we should use? Different time horizon? Salaries? Tax Rates? Let's discuss this.

I applaud the effort.

 

I will look more into your calculations soon, but off the top of my head, which you made reference to earlier is that unemployment benefits are nornally 26 weeks and that it is not a given that those extended benefits will continue on to 2011.

[KD in CA]

Hey Washington, thanks but I don't need a $5000 tax credit to hire more employees. What I need is:

 

--Lenders that are not scared sh--less about what Washington is going to do next to hamper their businesses,

--I need to know that I'm not going to have to fund some insane health care boondoggle,

--I need to not have state governments trying to suck my blood from every orifice for any reason they can think of,

--I need to not pay my auditors tens of thousands of extra dollars because of all the overbearing regulation forced on them by the SEC

--I need to not worry about being subjected to a lawsuit every time I fire a crappy employee because he might be a woman/black/gay/Arab/etc.

 

 

Thanks for listening!

[Magox]

Hey Washington, thanks but I don't need a $5000 tax credit to hire more employees. What I need is:

 

--Lenders that are not scared sh--less about what Washington is going to do next to hamper their businesses,

--I need to know that I'm not going to have to fund some insane health care boondoggle,

--I need to not have state governments trying to suck my blood from every orifice for any reason they can think of,

--I need to not pay my auditors tens of thousands of extra dollars because of all the overbearing regulation forced on them by the SEC

--I need to not worry about being subjected to a lawsuit every time I fire a crappy employee because he might be a woman/black/gay/Arab/etc.

 

 

Thanks for listening!

There is alot to be said regarding KD's rant. I touched on this earlier.

 

Businesses don't want to have to shoulder new burdens specially not in a time when market conditions are extremely challenging. The other things that small businesses don't want is uncertainty, and right now there is alot of that going on.

[IDBillzFan]

Hey Washington, thanks but I don't need a $5000 tax credit to hire more employees. What I need is:

 

--Lenders that are not scared sh--less about what Washington is going to do next to hamper their businesses,

--I need to know that I'm not going to have to fund some insane health care boondoggle,

--I need to not have state governments trying to suck my blood from every orifice for any reason they can think of,

--I need to not pay my auditors tens of thousands of extra dollars because of all the overbearing regulation forced on them by the SEC

--I need to not worry about being subjected to a lawsuit every time I fire a crappy employee because he might be a woman/black/gay/Arab/etc.

 

 

Thanks for listening!

 

Dear Right Wing Capitalist Pig,

 

We wouldn't be in this situation if it weren't for your last eight years of failed policies, so take the money, sit down, and STFU.

 

Sincerely,

 

Hope and Change

[KD in CA]

There is alot to be said regarding KD's rant. I touched on this earlier.

 

Businesses don't want to have to shoulder new burdens specially not in a time when market conditions are extremely challenging. The other things that small businesses don't want is uncertainty, and right now there is alot of that going on.

 

As you correctly pointed out, $5k is no incentive. I can simply delay the new hire by one month and save $5. Plus, it's a certainty that the paperwork and regulations these idiots would want you to comply with to justify the grant would cost more than the $5k.

 

Honestly, these f*#*ing morons couldn't possibly be dumber if they tried.

[jjamie12]

Hey Washington, thanks but I don't need a $5000 tax credit to hire more employees. What I need is:

 

--Lenders that are not scared sh--less about what Washington is going to do next to hamper their businesses,

--I need to know that I'm not going to have to fund some insane health care boondoggle,

--I need to not have state governments trying to suck my blood from every orifice for any reason they can think of,

--I need to not pay my auditors tens of thousands of extra dollars because of all the overbearing regulation forced on them by the SEC

--I need to not worry about being subjected to a lawsuit every time I fire a crappy employee because he might be a woman/black/gay/Arab/etc.

 

 

Thanks for listening!

I am, obviously, 100% in agreement with all of this. (Although I don't think anyone described as a 'small business' needs to worry about overbearing regulation of the SEC)

 

However, we aren't talking about this, we're talking about the $5K tax credit. KD, you seem pretty definitively against it, as well as LA... Both of you see 'no' incentive in the $5K. Is there a chance that there are *any* businesses out there that would, though? It's an honest question. I've seen (well, actually Magox has seen) one estimate where 1 in 10 new hires would be directly relateable to the tax credit. Do you agree or disagree with the premise that there WILL BE some new hiring by small businesses that otherwise wouldn't based on this tax credit?

[Magox]

I am, obviously, 100% in agreement with all of this. (Although I don't think anyone described as a 'small business' needs to worry about overbearing regulation of the SEC)

 

However, we aren't talking about this, we're talking about the $5K tax credit. KD, you seem pretty definitively against it, as well as LA... Both of you see 'no' incentive in the $5K. Is there a chance that there are *any* businesses out there that would, though? It's an honest question. I've seen (well, actually Magox has seen) one estimate where 1 in 10 new hires would be directly relateable to the tax credit. Do you agree or disagree with the premise that there WILL BE some new hiring by small businesses that otherwise wouldn't based on this tax credit?

I found this today.

 

Detailed numbers and explanations that I thought you would find interesting.

 

President Obama is proposing, and Congress is considering, a temporary tax credit to encourage businesses to hire new workers. Given that 7.2 million workers that have lost their jobs since the recession began in December 2007, efforts to reduce government-imposed obstacles to hiring are commendable. The proposed tax credit, however, will not create the sustainable jobs needed for long-term recovery and will likely create no jobs on net.

 

Congress and the President should instead focus on lifting the burden of uncertainty off businesses by dropping their business-threatening agenda and permanently extending the 2001 and 2003 tax cuts.

 

Small Bang for the Buck

 

The credit proposed by President Obama pays $5,000 for each new hire a business makes in 2010. Businesses would also get refunds on their Social Security taxes if they increase wages or expand hours for existing-workers. The credit would be capped at $500,000 per business.

 

Congress tried a similar credit in the 1970s. It failed to create jobs, however,[1] because much like today, policymakers ignored the jobs the credit would destroy since it had to be funded by government borrowing. Therefore, the current proposal must be evaluated by its net job creation--a standard that requires looking at the jobs created by the credit and the jobs lost because the government has to finance the proposal.

 

On the positive side, according to the Congressional Budget Office (CBO), the credit would create five to nine years of full time employment for every million dollars of credits businesses take.[2] The White House estimates that the credit will reduce tax revenue by $33 billion.[3] Combining these two estimates shows that before offsetting effects, the credit might create between 165,000 and 297,000 jobs in 2010. This works out to a cost of $111,000 to $200,000 per job created.[4]

 

Unfortunately, the jobs that are created will have to be funded by borrowing, since there are no plans to reduce spending to fund the $33 billion cost of the credit. Government borrowing takes purchasing power out of private hands, and as a result, jobs that would have been sustained by that money disappear.

 

It is hard to predict how many jobs all the borrowing will scuttle, but a rough estimate can be made simply by comparing the ratio of total GDP to total employment. Using CBO's data on GDP for 2010 puts the ratio at about $106,000 per job. (This is less expensive than the cost of credit-financed jobs because the efficiency of the private sector enables it to support a job for less money.) Thus, the financing of the credit would reduce employment by about 311,000 jobs--a net employment decline of as many as 146,000 jobs.

 

The credit could actually end up reducing employment, because many of the jobs for which an employer would receive the credit would have been created without the credit in the normal dynamics of the labor market. The designers of the credit have no way to distinguish between jobs that would have been created without the credit and jobs created specifically due to the credit. Consequently, the overall impact of the credit is lessened, but the job destruction effects of all the borrowing are felt in full.

 

No Long-Term Jobs

 

Holding all else constant, the only way for the President's proposed credit to be a net jobs creator is if it is funded by spending reductions on other programs. But even if the credit does end up creating jobs on net, it is very likely those jobs will be temporary.

 

The credit will not encourage businesses to create the long-term jobs the economy needs for a robust recovery. Businesses that provide lasting jobs hire new workers on a permanent basis only when they expect that those employees will increase future profitability, which requires a reasonable expectation that the economy to be on a sustained, upward path for some other reason. There is nothing a tax credit can do to get businesses to hire as long as they expect sales to remain sluggish.

 

The temporary jobs that the credit would create would likely be in industries with high worker turnover or businesses willing to take on temporary workers that they can let go after the credit expires. When the credit expires, the additional worker will be long gone and the business will not fill the vacated position because the extra worker would no longer be profitable without the credit. The businesses create no new long-term job while maximizing the benefit of the credit.

 

It is a no-lose situation for these businesses because they can increase their profitability in the short term without worrying about the long-term impact of the extra worker. The credit will end up being a government-funded reward to these businesses for doing something they were going to do anyway.

 

This next part is what we were talking about.

 

Remove Uncertainty

 

By completely dropping the big-government, anti-business agenda currently making its way through Washington, Congress can remove a major obstruction in the way of businesses that want to add lasting, secure jobs when the recovery picks up.

 

Before adding new workers for the long term, in addition to an expectation of higher future sales, businesses need to anticipate what their cost structure will look like when conditions do improve. Unfortunately, businesses are unable to confidently assess their bottom lines for the next few years in part because of legislation that is threatening to drive their costs higher. This includes:

 

Higher taxes for businesses that operate internationally;

Higher taxes on energy because of the cap-and-trade bill;

Higher taxes and costly regulations as part of health care reform; and

Stricter regulations in a variety of other areas.

As long as these cost-raisers hang over them, businesses will be hesitant to add new workers. After all, employers could end up making investments and adding new workers that would become unaffordable if these bills become law. Therefore, Congress should immediately announce that it will not pass any of this legislation until the economy moves significantly toward full employment. This would give businesses some breathing room and the sense of certainty they need to grow--thereby accelerating the move toward full employment.

[jjamie12]

I found this today.

 

Detailed numbers and explanations that I thought you would find interesting.

 

 

 

This next part is what we were talking about.

This is perfect. Thanks for the link and the discussion. I'm going to do a little more digging on this to see if there are any other studies done. I'm a little bit surprised at this comment: "It failed to create jobs, however,[1] because much like today, policymakers ignored the jobs the credit would destroy since it had to be funded by government borrowing." Personally, I'm having a hard time with the idea that $30 billion in government borrowing would destroy any jobs in this environment, but this is just a gut reaction. I'll need to think about it some more.

 

Based on the above, they get a cost per job of between $111,000 and $200,000 per job created, vs. my estimated $50,000. This type of cost per job created will never turn into a positive NPV on the revenue side of the equation because the jobs created (most likely) won't be that high paying. I'll do a little more research and try to see if there are other estimates for that cost number. If their estimates are correct, I'd imagine you'd have to say that, without a doubt, this credit is not a good idea.

 

And, of course, I agree with all of the things in the bottom section that you quoted. These things are certainly important and should be pursued.

[KD in CA]

I am, obviously, 100% in agreement with all of this. (Although I don't think anyone described as a 'small business' needs to worry about overbearing regulation of the SEC)

You'd be surprised. Much of the legislation (and its impact on auditors' risk assessment) inspired by the 'crack down on the big offenders' movement (i.e., post-Anderson/Enron) has changed fundamental auditing practices that firms use for ALL clients, large and small. My auditors spend weeks going through minutia that I wouldn't have wasted ten minutes on when I was an auditor 20 years ago. And they charge for the extra work.

 

However, we aren't talking about this, we're talking about the $5K tax credit. KD, you seem pretty definitively against it, as well as LA... Both of you see 'no' incentive in the $5K. Is there a chance that there are *any* businesses out there that would, though? It's an honest question. I've seen (well, actually Magox has seen) one estimate where 1 in 10 new hires would be directly relateable to the tax credit. Do you agree or disagree with the premise that there WILL BE some new hiring by small businesses that otherwise wouldn't based on this tax credit?

I don't see it as an incentive for a few key reasons:

 

1) The average employee costs $100k/year all in; A 5% rebate from the gov't for year 1 isn't enough to change my decision making. I can choose to pay him $5k less salary or wait a month to hire him and get the same impact.

 

Remember, small businesses hire in ones and twos. It's not like I need to add 100 people a month just to keep up with attrition, thus making several million dollars worth the effort.

 

2) There will be a burdonsome application and ongoing reporting requirement related to this. There always is. And you can be sure that they will load up the requirements with all sorts of affirmative action type nonsense. Please report each month how many employees with blue eyes were hired. The government never misses an opportuntity to use such 'incentives' as a means to stick their nose further into how you choose to operate your company's business. I already waste dozens of hours per month on useless gov't reporting b.s. I can't afford to waste anymore.

 

3) It's not even cash, it's a tax credit. I don't even get the cash flow benefit this year, which is the year I'm worried about.

 

As to your question about whether anyone would find it valuable? Well, if someone is going to hire people anyway, than sure, they might be happy to have $5k. But those are the people that were going to hire ANYWAY, so why blow more taxpayer money???

 

Plus, I am fundamentally against almost any new government 'program' that requires a futher bloating of the federal payroll.

[KD in CA]

I've seen (well, actually Magox has seen) one estimate where 1 in 10 new hires would be directly relateable to the tax credit.

I put very, very, very, very, very little faith in such 'estimates'. I don't know how one could possibly determine that. It's a b.s. statement designed to give people a starting point for ROI analysis.

 

100% of all hires are made because you need someone to fill a need. 0% are made because someone is going to give you a tax credit. I have a parallel example; post 9-11, companies received a $5000 grant for every person you hired in the area around ground zero. We ended up hiring several people and claimed our grant. Did we hire any of them so we could boost up our grant #s? Of course not. We hired them because it was the right business decision.

 

Now, did we keep our offices in lower Manhattan as opposed to New Jersey partly as a result of the 9-11 office-lease retention grants? Absolutely. But that's a completely different animal.

[pBills]

Hey Washington, thanks but I don't need a $5000 tax credit to hire more employees. What I need is:

 

--Lenders that are not scared sh--less about what Washington is going to do next to hamper their businesses,

--I need to know that I'm not going to have to fund some insane health care boondoggle,

--I need to not have state governments trying to suck my blood from every orifice for any reason they can think of,

--I need to not pay my auditors tens of thousands of extra dollars because of all the overbearing regulation forced on them by the SEC

--I need to not worry about being subjected to a lawsuit every time I fire a crappy employee because he might be a woman/black/gay/Arab/etc.

 

 

Thanks for listening!

 

 

Quick question... aren't those lenders the same ones that received help from Washington?

[GG]

Quick question... aren't those lenders the same ones that received help from Washington?

 

The units that got "help" are not the ones who would be lending to KD. Not that you would understand that nuance.

[KD in CA]

Quick question... aren't those lenders the same ones that received help from Washington?

Thanks for reinforcing your image as an idiot. Not capable of dealing with the topic on any level are you?

 

Obama Idea = Good!

 

 

The units that got "help" are not the ones who would be lending to KD. Not that you would understand that nuance.

What are you saying, Goldman isn't interested in giving me a $1MM receivables-backed line?

[GG]

What are you saying, Goldman isn't interested in giving me a $1MM receivables-backed line?

 

Even the Citi, JP Morgan & BoA units that got the TARP aren't the ones who will talk with the likes of you

 

Just because they all sit under the same corporate name, doesn't mean that the lending spigot to small business is now open because the traders got bailed out.

[DrFishfinder]

A $5k tax credit is NOT going to offset the cost of me hiring another person at this point. Nor would a $10k credit. My clients are simply NOT spending money, period. Hiring another person is not going to change that.

 

This recession will be over and things will start to pick up if and when banks start making loans to small businesses, again. Not before.

[Alaska Darin]

A $5k tax credit is NOT going to offset the cost of me hiring another person at this point. Nor would a $10k credit. My clients are simply NOT spending money, period. Hiring another person is not going to change that.

 

This recession will be over and things will start to pick up if and when banks start making loans to small businesses, again. Not before.

I think even that's a little too easy. I'm sure that will help but until the federal government proves it's serious about fixing what ails the dollar and doing something about the deficit/debt, business is going to sit on its hands.

[Magox]

Quick question... aren't those lenders the same ones that received help from Washington?

uyy yu yuuuuuy

[IDBillzFan]

A $5k tax credit is NOT going to offset the cost of me hiring another person at this point. Nor would a $10k credit. My clients are simply NOT spending money, period. Hiring another person is not going to change that.

 

This recession will be over and things will start to pick up if and when banks start making loans to small businesses, again. Not before.

I don't think getting loans to small businesses is enough if the businesses don't have customers ready to buy their service or product. It's an important component, but the people need to spend, and they're not spending...they're saving. And they're saving because they're watching DC try to buy their way out of this problem while watching their employer try to figure out who's the next to go.

[finknottle]

A $5k tax credit is NOT going to offset the cost of me hiring another person at this point. Nor would a $10k credit. My clients are simply NOT spending money, period. Hiring another person is not going to change that.

 

This recession will be over and things will start to pick up if and when banks start making loans to small businesses, again. Not before.

 

As a small business, I agree - 5 or 10k is not going to get me to a worker unless I'm already convinced I am going to anyway. There is too much political and regulatory uncertaintity, and as somebody already pointed out I bet the hassle of getting the money greatly diminishes the savings for only one or two hires.

 

But I'll disagree on one point, and probably take some abuse for it. I think the equity situation is overblown. All of the small companies I am dealing with have strong cash positions. The ones with cash problems are the startups, and those managing their finances on the edge. If anything, the healthy conservatively-run companies are eyeing the over extended for aquisition. And, when you think of it, that kind of cannibalism is a healthy signal in a recession. IMO the only thing slowing this down - resulting in layoffs and bancruptcies rather than consolidation - in uncertaintity over what Washington will do with new regulations and new taxes.