August 18, 2022

Economix: Making Hiring Cheaper

On Friday, I wrote about how equipment and software prices are getting rapidly cheaper while the cost of labor has been getting more expensive, making capital a more attractive investment to companies than people. Tax incentives that encourage earlier capital investment may be helping, too.

In the past week, there has been some buzz about creating similar tax incentives that would subsidize labor, such as allowing employers to forgo paying their share of payroll taxes for any net new hires.

Reuters and Bloomberg News reported, for example, that the White House is considering such a proposal. Times reporters had been hearing, though, that the idea was not yet seriously under discussion.

Then today, Larry Summers, who until recently served as President Obama’s top economic adviser, wrote in The Washington Post that he believes employers should get a payroll tax cut, although he did not specify whether the tax cut should be applicable to new hires only.

On its face, a payroll tax cut should have bipartisan appeal: It helps unemployed people, which pleases Democrats, and it cuts taxes for businesses, which pleases Republicans. A similar tax cut implemented in the 1970s also has received generally favorable evaluations from economists.

One possible reason this idea has not gotten much traction lately, though, is that Congress passed a temporary job creation tax cut last year that does not seem to have been terribly effective. It had some major design flaws, and was not well-publicized. If employers don’t know about a hiring tax incentive, it’s not going to have any impact on their behavior.

On the other hand, it’s entirely possible that Washington is considering such a tax incentive but loath to loudly advertise it. After all, long drawn-out discussions could end up worsening the job market if they encourage employers to delay hiring and wait for the best possible deal.

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