Obama "Tax Credit"?

Obama has revealed his budget.  As expected, he proposes letting the Bush Tax Cuts on the "wealthy" expire while leaving those making under $200K untouched.  To "help stimulate" job growth, he also proposes a $5000 "tax credit" for employers each time they hire someone.  Some people are stupid enough to think that this makes some kind of business sense.

Let's take a look at what it costs to hire someone for a $20K per year salary.  In addition to the salary, the employer also has to pay unemployment tax (6.2% of the first $7000), social security (6.2%), and Medicare (1.45%).  This total comes out to $21,964.  This is just Federal requirements.  Add in State employment taxes, and you're easily looking at $24,000 total between salary and tax burden.  Hmm... so far that $5000 credit is making sense.

Now, if this is a "good" employer, there will also be other benefits, including health insurance, offered.  Health insurance for an individual averages around $2000 and families around $7000.  So let's assume that we are putting a father who has a family back to work: our total is now ~$30,000.

So at fixed costs, we're easily looking at $30,000 invested into a $20,000 position.  What about the variable costs that may not be directly tangible... like training?  Or the time it takes to ramp up to the point where the employee is producing enough output to offset his cost of employment?  It can be reasoned that a $20,000 position can cost more than $40,000 for the employer.

Where am I going with all of this?

In a down economy where everyone is still trying to tighten their belts and many consumers don't have much discretionary income to spare, many business are either operating in the red or coming close.  There is a reason for layoffs and paycuts.  So in order for a company to hire someone, they need to have a reason to believe that their investment in a new employee will yield a worthwhile return.

While this tax credit might help provide an incentive for big businesses to go on a hiring spree, this does nothing for the small businesses that it is advertised as being targeted toward.  Why?

By increasing the taxes made on those whose incomes are greater than $200,000 per year, many small business owners will be seeing a much greater tax burden.  How does this affect their business?  Many small businesses are taxed via "pass-through", meaning that the owner is directly responsible for the taxes of the business.  If his tax burden goes up, the business's tax burden goes up and there is less money to expend on hiring new workers.

So much for an incentive to hire new workers...