We Need Permanent Tax Reform

Aug 19, 2011 Issues: Jobs and Employment, Tax Relief

What is the difference between a good idea and a bad idea? Sometimes the difference is slim. When it comes to tax policy, something that sounds good can still be a failure.

This week, President Obama announced he would put forward a new plan to encourage job growth at the beginning of September. Some of the details have already leaked to the press. At the top of the list are tax cuts for companies that hire new workers. Most likely this will be done by giving employers a break on the payroll tax for each new employee hired.

This has been tried before. We only have to look at past examples to see that there are better ways to provide a tax break to employers.

In 2010, the President signed the HIRE Act. This bill eliminated the employer’s contribution to the payroll tax when they hired someone who had been out of work longer than 60 days. If the employee stayed at least one year, the HIRE Act granted the business an additional $1,000 credit. However, this credit was only temporary. After a year, the employer was again required to pay their share of the payroll tax.

New York Times economics writer Catherine Rampell sums up the problem with the credit in this way: “The challenge, of course, is making sure that the tax credit actually induces hiring, rather than just being claimed for people who would have gotten jobs anyway.”

Rampell goes on to note that economists have no clear way of figuring out what difference the tax credit made in hiring. When the Treasury Department held a conference call to discuss the program they included the CEO of a North Carolina company. He openly admitted that the tax benefit was not directly responsible for the decision to hire new employees, although he was appreciative of the extra cash.

The HIRE Act wasn’t an original creation of the Obama administration. In 1977, President Carter signed similar legislation. The results were similar—little real affect on the unemployment rate.

I believe that the best way to provide a break to employers is through permanent tax reform. There are two major problems with our current tax system: uncertainty and complexity. Neither of these problems is solved with a temporary credit for new hires.

For the past few years small employers have faced the possibility of a significant increase in their tax burden. It was only late last year that Congress was able to reach an agreement to extend current tax rates for another two years. Now employers are less than a year and a half away from facing the same tax hike.

The job growth we really want to see is full-time, long-term positions. The type of job that provides assurance for families so that they can invest in a new home, purchase a new car, and settle into their community. That’s the kind of job that is good for people and for the economy. When employers think about creating these type of jobs, they have to look years down the road. Only permanent change to the tax code can provide certainty to spur long-term employment.

We also need to simplify the tax code by eliminating special interest provisions. All of these special interest provisions add complexity that make it harder to comply with the tax law and make it harder for the government to figure out who is following the law. If we eliminate the hundreds of billions of dollars in special tax breaks, we could actually reduce the marginal and corporate tax rates without reducing government revenue.

The best thing about permanent reform is that it would encourage economic growth, decrease unemployment, and increase government revenue. Ronald Reagan signed the Economic Recovery Act in August of 1981, the largest tax cut in American history. In just eight years, government revenue increased from $599 billion to more than $1 trillion.

I’m glad that the President is thinking about how we can change the tax code to encourage private sector employment. He’s on the right track. However, it is permanent reform—not a temporary break—that employers truly need. That’s the difference between a good idea and a bad idea.

Congressman Joe Pitts represents the 16th Congressional District of Pennsylvania.