Perverse Incentives

Senator Schumer, a Democrat, and Senator Hatch, a Republican, have an op-ed piece in today's New York Times proposing to give businesses tax incentives for hiring unemployed workers. Here's what they propose: "Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll tax on that employee for the duration of 2010. The Social Security trust fund will then be made whole with spending cuts elsewhere in the budget between now and 2015. That's it. Simple to understand, and easy to explain." Like many efforts to use the tax code to fine-tune the behavior of firms or individuals rather than to efficiently and fairly raise the revenue required for government, however, this idea has problems that Mr. Schumer and Mr. Hatch don't confront in their article. What's to stop a business from firing its employees now and then re-hiring them two months later to take advantage of the tax benefit? If you are an employer interviewing a promising job applicant who has been unemployed for 30 days, are you going to tell that person to start work tomorrow, or wait a month so that you can take advantage of the tax benefits? If you were fired yesterday, are you going to start looking for work today, or wait 45 days until you are more appealing to a potential employer who knows about the tax benefit? The effect of the Schumer-Hatch proposal might be to retard job growth rather than to spur it. As we've noted before, neither the Republicans or the Democrats have a monopoly on bad ideas in Washington.