One of America's greatest needs is to create jobs in ways that won't speed up inflation. A cleaning company in a major eastern city seems to be doing a spectacularly good job of it.
In each of the last six years, this firm has hired 300 to 400 people referred by the local welfare office. It receives a work incentive (WIN) tax credit of 50% of the first $6,000 of wages paid in the first year of employment and 25% of the first $6,000 in the second year. Many former welfare recipients have now been with the company for three years or more.
Moreover, helping the poor has been highly profitable. The tax credits add 10% to 15% to the firm's profit margin.
Unfortunately, this success story is very unusual. Fewer than 15,000 employers went through the complex procedures required to claim WIN tax credits in 1979. The company described was single-handedly responsible for nearly 1% of all WIN credits in the nation. And another, similar tax credit program -- called the Targeted Jobs Tax Credit -- is likewise underused.
Job-creating tax credits don't have to go unused. In 1977 and 1978 Congress authorized a credit much less complex than today's WIN or Targeted Jobs Tax Credits. It was called the New Jobs Tax Credit, and it went to 1.1 million firms, most of them small, in the last year it was available.
It seems to have been effective in creating real jobs, and it showed that a well-designed tax credit system -- one that the smaller companies, which create most jobs, can understand and use -- could make a major contribution to solving the problem of unemployment.
The New Jobs Tax Credit allowed firms an income tax deduction of half of any increase beyond 2% in the wage base they reported under the Federal Unemployment Tax Act, up to a maximum of $100,000. Since the Federal Unemployment Tax Act generally required firms to report only the first $4,200 in wages paid each employee in 1977, when the credit was first offered, the subsidy covered only the first $4,200 in wages, too.
The number of working Americans rose by nearly 3,700,000 from May 1977, when the subsidy was announced, to December 1973, when it ended. The economy was growing in that period, so presumably a lot of those jobs would have been created even without the New Jobs Tax Credit.
But three major studies have examined the New Jobs Tax Credit -- and all have indicated that a significant share of those jobs wouldn't have existed without it. When the National Federation of Independent Business surveyed its members a year after the program was launched, 4% of respondents said the credit had caused them to increase hiring. If those respondents were typical of all smaller firms, the implied national impact would be 300,000 new jobs in the program's first year.
Jeffrey Perloff and Michael Wachter of the University of Pennsylvania found in Census Bureau data that even when the growth rate of firms' sales was identical, employment at firms that knew about the New Jobs Tax Credit grew 3% faster than employment at firms that didn't know about it. This indicated the credit created about 700,000 new jobs in 1977.
I did my own research on the subsidy's effect over time on employment in two industries: construction and wholesale and retail trade. My study found that the New Jobs Tax Credit created between 130,000 and 670,000 jobs in those industries.
Hundreds of thousands of jobs may still seem a poor return on a program that cost the federal government $3 billion. But it's important to note that the credit seems to have reduced inflation, too. Because the small companies that received the credits tended to be highly competitive, most of the credits seem to have passed on to consumers in lower prices. My calculations suggest the jobs subsidy reduced by billions of dollars the margins between manufacturers' wholesale prices and retail prices to the consumer. While wholesale prices of nonfood consumer goods were rising 6.6% between May 1977 and June 1973, for instance, retail prices of the same goods rose only 4.7%.
Studies of tax credits can never provide definitive evidence, but all this seems to indicate that well-designed employment subsidies can increase employment while reducing inflation.
Congress failed to renew the New Jobs Tax Credit, however, replacing it with programs so complex that few smaller companies can use them.
WIN Tax Credits and Targeted Jobs Tax Credits are likely to remain underused because the eligibility rules are complicated, because the relationship between government and business is hostile, and because no one who really wants a job will advertise that he is on welfare. It's often hard to figure out whether a job candidate is eligible for WIN or Targeted Jobs Credits.
It's too bad the government has to make things so complicated. Job tax credits can work, but only if they're kept simple.