Obama Announces $33B Hiring Tax Credit

Jan. 29, 2010 — -- President Obama announced today a proposal to establish a $33 billion tax credit to encourage small businesses to hire more workers and increase wages. The plan is one of several the president is pushing to help bolster employment in a country where one in 10 Americans no longer receives a paycheck.

The announcement comes two days after the president's first State of the Union address, when he said that jobs must be the U.S.'s top priority this year.

The tax credit, the president said, "is a simple, easy-to-understand mechanism that will cut taxes for more than 1 million small businesses."

Obama, who spoke today at the Chesapeake Machine Company's manufacturing plant -- a Baltimore firm employing 40 people -- said the credit will give small businesses "an incentive to hire more people and a little bit of extra money to pay higher wages, to expand work hours or invest in their company."

The president also reiterated his call for the Senate to pass a jobs bill. The House last month approved a $150 billion bill that included some of the job creation efforts touted by the president. Some Republicans, meanwhile, have also introduced proposals for business tax breaks and Obama said that he looked forward to working with them.

"I'm open to any good ideas from Democrats or Republicans," he said.

Critics argue that among Obama's proposals, some are more realistic than others. Below, ABCNews.com takes a look at the president's plans and where, some say, they fall short.

Small Business Tax Credits for Hiring, Raising Wages; Eliminating Capital Gains Taxes

Under the president's proposed tax credit, businesses would receive a $5,000 tax credit for every net new employee that they employ in 2010. The total amount of credit will be capped at $500,000 per firm to ensure that the majority of the benefit goes to small businesses.

Though increasing payrolls would typically lead to an increase in Social Security taxes, under Obama's plan, small businesses would be reimbursed for the Social Security payroll taxes they would pay on real increases in their payrolls, including wage increases. The reimbursements would not apply to pay raise that bump compensation above $106,800, the Social Security taxable maximum.

The White House estimates that 1 million small businesses would benefit from the credit.

The idea of a tax credit to promote hiring is an idea that's been making the rounds for some time.

But critics say small businesses might hesitate to take advantage of the tax credit if lagging demand means they don't actually have the need for more workers.

"A lot of it is just confidence,"said Gus Faucher, the director of macroeconomics at Moody's Economy.com. The tax credit, he said, " may help a bit around the margins, but small businesses need to be convinced that the expansion is going to keep going. I'm not sure the tax credit is going to be that useful into getting them to hire unless they're convinced that the demand is going to be there."

John Schmitt, an economist at the progressive Center for Economic and Policy Research, said there's no reason not to extend the credit to large businesses too. According to the SBA, firms with fewer than 500 workers employ just over half the U.S. private sector labor force, leaving the rest, Schmitt said, to large businesses.

"Small businesses create a lot of jobs, but large businesses create a lot of jobs too," he said.

Schmitt questioned whether the credit might prove inefficient -- small businesses that planned on hiring anyway could still reap the benefits of the credit.

"In any kind of context like this, you want to spend money on changing people's behavior. You don't want to give money to people for things that they were going to do anyway."

The same is true, he said, for ending capital gains taxes for small businesses, which is meant to increase their investment in equipment and other capital expenditures.

Even without the elimination of capital gain taxes, "how many of these people would have made those investments anyway?" he asked.

Obama today responded to concerns that the credit would benefit businesses that had already planned on increasing hiring.

"It's true that in some instances this tax credit will go to businesses that were going to hire folks anyway. But then, it simply becomes a tax cut for small businesses that will spur investment and expansion. And that's a good thing, too," he said. " And that's why this type of tax cut is considered by economists -- who rarely agree on anything -- to be one of the most cost-effective ways of accelerating job growth."

The president said that his proposal would also include provisions to prevent businesses from "gaming the system."

He said, for instance, that an employer would not be eligible for the tax credit if he doubled his workforce but cut each worker's hours in half.

"We're not going to let you game the system to take advantage of the tax credit, unless you're doing right by your workers," Obama said.

Whether they're for businesses large or small, incentives to get businesses to buy more equipment and the like benefits the economy because it may encourage suppliers to increase their payrolls to keep up with rising demand, supporters say.

While "it's not directly impacting the labor market, stronger demand for investment leads to strong hiring down the road," Faucher said.

But, once again, it may not be the most efficient way to encourage hiring -- at least not in the U.S. That's because so much of the manufactured products purchased by U.S. companies are made abroad.

"A lot of that money will not go to job creation here in the U.S.," said Schmitt. "A lot of it may go overseas."