The $3,000 Trojan Horse

President Obama delivered his first State of the Union address February 27. The speech was a smorgasbord of ideas but in this commentary I want to focus on one item in particular, the proposed $3,000 tax credit to businesses who hire new employees. A $3,000 tax credit may sound good to a struggling small business but this tax cut is actually a Trojan horse and does more damage than good.

Why do businesses hire employees? Either business owners hire employees to do a job they do not know how to do such as hiring an accountant, engineer, or some other specialized profession or a job they do not have time to do. Business owners should never hire someone simply to get a tax credit unless the tax credit covers the entire cost of hiring that employee.

A $3,000 tax credit would hardly cover the cost of hiring someone when you take into account the total cost involved in hiring someone. Not only does a business owner have to pay their employees salary but they also have other expenses (e.g. payroll taxes, benefits, worker’s comp insurance, social security matching).

The $3,000 tax credit is a joke for it is asking employers to hire someone they do not need, pay these unnecessary employees a salary along with benefits, match their social security withholding, payroll taxes, and worker’s comp. insurance for a measly $3,000. I urge business owners not to give into the temptation to hire solely to get a tax credit.

Instead of a gimmicky tax credit, our government needs to offer across the board tax cuts to spur economic activity. These tax cuts will put additional discretionary income into the hands of consumers. These consumers will spend this money at businesses that will need to expand and hire additional employees to keep up with increasing demand. These newly hired employees will go off the unemployment rolls and have additional income to spend thus increasing demand even more. The tax cuts are actually not cuts at all but investments in the private sector of our economy and the government receives a return on investment via increased tax revenues spurred by increased business activity and profits.

This method of increasing economic activity through tax cuts has worked three times in our history. JFK did it in the 1960’s leading the country into a decade of economic expansion. Ronald Reagan did it in the 1980’s bringing us out of the stagflation of the late 70’s. President George W. Bush did it in the 2000’s bringing us out of the dotcom bubble and the recession caused by the 9/11 attacks. This type of incentive program using tax cuts has a proven track record and is the answer to this recession as well.

However, instead of tax cuts, the administration seems determined to increase spending and taxes in the hope this will increase economic activity and lead to recovery. In fact, unless the congress does something to prevent it, we are facing the largest tax increase in our nation’s history at the end of 2010. Next week we will look at these pending tax increases.