Here’s a good question. We all recognize that government uses taxes to create incentives, right? If you raise taxes on x, x will decrease. If you reduce taxes on x, x will increase. Thus we raise taxes on cigarettes to reduce the amount of tobacco people consume. Many argue that to reduce the amount of gasoline we burn, we have to increase the gasoline tax. On the other side, because we want to increase the amount of domestically produced oil, we introduce an oil depletion allowance, which effectively reduces the tax on companies engaged in oil production.
Taxes on employment operate the same way. To increase jobs, reduce taxes on employment contracts. To subtract jobs, increase taxes on employment contracts. In another article, I listed all the kinds of taxes on employment. It starts with the federal income tax and continues from there. It’s a pretty long list.
So, at a time when all of us ask, how do we create more jobs, how do we create more jobs, why don’t we reduce taxes on employment? The president even suggested that we institute what amounts to a tax holiday for certain kinds of employment taxes. When I hear about tax holidays, I ask right away: if a tax holiday is a good idea, why not reduce the tax for good and leave it at that? If you want to realize a temporary benefit from a temporary tax break, why not realize a permanent benefit from a genuine tax reduction?
The primary reason we give for not permanently reducing taxes on employment contracts is that we do not want to increase the government’s deficit. Yet we know that as more people go to work, revenues go up, not down. Politicians understand that. They also understand that once you reduce taxes, it is quite difficult to raise them again. They do not want to be in a position, ever, of having to propose a tax increase to voters. They prefer to keep the current taxes in place, even if high taxes impede job creation.
So how do can we reduce taxes on employment contracts? One method is to take on one tax at a time. A second method is to seek comprehensive tax reform. A third method would leave the current tax regime in place, but enact special tax breaks and incentives around the edges to encourage firms to hire. We have heard talk of all three. We have also seen these proposals go nowhere. Also, when did you last hear a political leader tie a reduction in employment taxes to an increase in employment?
Interestingly, political leaders pretend they have limited options for increasing employment, when they actually have a large number of options. The number is large because the number of taxes is large. If they want to undertake tax reform that increases employment, they have so many options that the problem is where to start. By pretending they have reached the limit of their own effectiveness, they can avoid uncomfortable questions about tax reductions. They don’t have to think about how hard it would be to raise taxes again in the future.
Remember this when politicians talk helplessly about taxes: a tax reduction does more than add a quantum of cash to the net take-home pay in your paycheck. When you reduce taxes on employment contracts, you make it easier for a company to hire you. If you want to create more jobs, that is exactly what you want to do: make it easy for companies to hire more people. If companies can grow and increase their ability to make profits when they hire more employees, they will hire more employees.