To immediately jump start the desperately needed US private sector job creation, I think there must be bold legislation that increases US business demand sufficiently for businesses to quickly create jobs. Also, there also must be certainty that this increased US business demand clearly and directly results in substantial private sector job creation. Further, this should be done optimally, so that it is paid for, as determined by very prudent CBO front-end scoring.
The best way to increase US business demand is to simply give US business customers lucrative investment tax incentives that directly do just this. Thus, the old investment tax credit is clearly the optimal way to create US business demand, when things are so bad on the job front.
The widespread Republican proposal of just reducing the top income tax rate on the “job creators”, both wealthy individuals and corporations, and expecting that to indirectly “trickle down”, is flat out crazy reasoning.
But I also think the widespread Democratic proposal to just continue to spend money on programs that are needed in the expectation that it will “trick up” and create jobs, is equally crazy reasoning.
Instead, I think the US Government should be designing wise tax incentives for US businesses to execute that clearly and directly create US jobs in the private sector.
Thus my proposal here is a highly-charged-to-the-maximum, truly Explosive Jobs Tax Credit and Investment Tax Credit combination (EJ&ITC), with the goal to both create good jobs and, at the same time, to enhance business innovative productivity.
Under my proposal, I would set the Jobs Tax Credit earned by a business for each net new full-time job added to be within a range.
The low of this Jobs Tax Credit range would be $10,000 for each net new job added by businesses of all sizes.
The preliminary high of this Jobs Tax Credit range would vary depending on business size. I would clearly offer a higher Jobs Tax Credit for smaller businesses than for larger businesses.
I think a preliminary high of this Jobs Tax Credit range for each net new job added might be:
…..Smallest Businesses…..$30,000
…..Smaller Businesses…...$27,500
…..Midsized Businesses….$25,000
…..Larger Businesses…….$22,500
…..Largest Businesses……$20,000
The Feds can decide the cutoffs for the businesses to be included in the above Five Tiers of business sizes.
The purpose for having this $10,000 Jobs Tax Credit per job minimum is to reward all companies taking the opportunity to enhance their productivity by hiring and training new highly-motivated employees, and to do so without adding much in the way of capital expenditures.
Now let me focus on the much more complicated maximum Jobs Tax Credit per job added.
First, the higher the new people added are paid, the higher the Jobs Tax Credit per employee added will be.
To encourage higher pay for the new hires, and also to discourage lower pay for new hires, I think this tax credit per job added cannot exceed a certain percentage X the actual average annual base pay for new hires for the company earning this tax credit in the current period.
And I would vary this percentage based on the size of the business, something like this:
…..Smallest Businesses…..60%
…..Smaller Businesses…...55%
…..Midsized Businesses….50%
…..Larger Businesses…….45%
…..Largest Businesses……40%
What this means is that for a Midsized Business, if the average annual base pay for new people hired this period is $55,000, then the ceiling for the Jobs Tax Credit remains at $25,000, since 50% X $55,000, or $27,500, is higher than the $25,000.
On the other hand, let’s say a Midsized Business is hiring new employees on the cheap, with the average base pay of new hires being only $30,000 per year. In this case, the ceiling for the Jobs Tax Credit gets reduced from $25,000 per net new job added down to $15,000, or $30,000 X 50%.
So we now have the maximum and minimum range of Jobs Tax Credit per net new job set.
So let me address the more complicated capital expenditure element, which turns this Jobs Tax Credit into an “Explosive Jobs and Investment Tax Credit” (EJ&ITC) Combination.
I think this EJ&ITC should be healthy enough to accomplish the US business demand goal, and also to accomplish it as quickly as possible.
Thus, I would set the credit at 15% of new US eligible property purchased from now until the end of 2011, and then reduce it down some to 10% for all of calendar 2012 eligible property purchases.
For maximum effect, this EJ&ITC should apply to all (yes, that’s by both large and small businesses) new property placed in service in the US that is depreciable under MACRS, and that has a Recovery Period of seven years or less (i.e. all Three-Year Property, Five-Year Property, and Seven-Year Property). When you check out the Tax Code, you'll see that.....wow, these three MACRS property categories are pretty all encompassing.
In addition, all new building costs and building remodeling costs should be eligible.
Also, to spice up the business innovation aspect of this proposal, any external computer software costs, any external computer software development costs, and any external web site development costs, should also all be eligible.
To further spice up US business innovation and US business competitive advantage, I think any US Research & Development Expenditures above the previous year comparable period amounts should also be eligible.
By combining together a Jobs Tax Credit and an Investment Tax Credit, this proposal substantially increases demand for US manufacturing and other businesses by providing very healthy tax incentives to US business customers to purchase innovative equipment and other property, along with providing an intertwined tax incentive for this business customer to also hire new employees.
And the merger of this property acquired with the key new employee element puts the company in a much better position to enhance its overall productivity, and to have its products and services better compete globally in the world economy.
Although this proposal focuses principally on enhancing the US manufacturing sector, all US businesses can benefit from the EJ&ITC, and thus can also benefit from it by having their productivity enhanced.
And in a twist that will make this proposal particularly explosive, the tax credit isn’t just on purchases of this property, but also on sales of this same property. Thus both sides of the transaction are highly charged to close the deal, and make the sale and purchase occur, and to do so expeditiously.
I would set the tax credit for the sale at precisely half of the tax credit on the purchase. Thus, I would set the credit at 7.5% of new US eligible property sold from now until the end of 2011, and then reduce it down some to 5% for all of calendar 2012 eligible property sales.
Let me illustrate the computation of the EJ&ITC for a Midsized Business.
Let’s assume that a Midsized Business places in service, from now until the end of 2011, total eligible property of $4 mil. The tentative tax credit on the purchase side for 2011, before testing for payroll count increases, is 15% X $4 mil, or $0.60 mil.
And let’s also assume that this same Midsized Business makes sales of total eligible property, from now until the end of 2011, of $6 mil. The tentative tax credit on the sales side for 2011, before testing for payroll count increases, is 7.5% X $6 mil, or $0.45 mil.
Thus this Midsized Business gets a tentative total tax credit for the total of the above two numbers, or $1.05 mil.
Now, going back to my earlier discussion on the Jobs Tax Credit range for each net new job added, let’s assume that there is an increase in US full-time jobs for this company for the remainder of 2011 of 50, and that the average annual base pay of all new hires for this company for the remainder of 2011 is $55,000.
For this Midsized Business, the maximum Jobs Tax Credit per new job added would be the $25,000 tentative ceiling, since this $25,000 is lower than $27,500 (50% X $55,000). And the total maximum Jobs Tax Credit for 2011 would be $1.25 mil, or $25,000 X 50 employees added.
The minimum Jobs Tax Credit per new job is $10,000. And the total minimum Jobs Tax Credit for 2011 would be $0.5 mil, or $10,000 X 50 employees added.
Since the tentative Tax Credit based on capital expenditures purchased and sold for the rest of 2011 is $1.05 mil, and it is also within the above $0.5 mil and $1.25 mil Jobs Tax Credit range, the final EJ&ITC earned by this Midsized Business for 2011 is $1.05 mil.
If instead, the total tentative total tax credit based on property both purchased and sold was $1.50 mil, the final EJ&ITC earned would be the top of the Job Tax Credit range, or $1.25 mil.
And if the total tentative total tax credit based on property both purchased and sold was only $0.25 mil, the final EJ&ITC earned would be the bottom of the Job Tax Credit range, or $0.50 mil.
The jobs added in 2011 would be simply the difference between the number of full-time employees when you start the tax incentive and the number of full-time employees at the end of the year, exclusive of those added from acquisitions.
The jobs added in 2012 would be simply the difference between the number of full-time employees from the beginning of the year and the end of the year, exclusive of those added from acquisitions.
This Tax Credit earned should be computed on a total US company operations basis. Thus, separate US companies controlled by the same US company should be combined.
To be eligible property purchased, it could be bought from any business, including from all retailers and wholesalers.
To be eligible property sold, it could not only be sold to any business, but also sold to any non-profit organization, such as a hospital.
For maximum effect, I would make this Tax Credit immediately refundable. Also, I wouldn’t reduce the tax basis of the property for the Tax Credit earned.
To make these jobs created remain for a reasonably long period of time, I would also include a tax recapture of this EJ&ITC if the increase in full-time jobs of this business doesn’t last for say four years. And I would have a 100% tax recapture for reductions in full-time payroll counts in the first two years, and a proportional time, pro-rata tax recapture for reductions in full-time payroll counts in years three and four. There would be no tax recaptured after four years.
It should be fairly simple to implement this tax credit program quickly. Its simplicity is enhanced by the ease in applying the payroll count requirements. Say it kicks in starting September 1, 2011. All you have to do is to count a company's overall combined US full-time payroll on that date and compare it with a similar count on Dec 31, 2011. The employee count change here is the relevant one used to compute the combined company tax credit earned for 2011.
And the same overall employee count change approach would be used to compute the combined company tax credit earned in 2012.
And for subsequent tax credit recapture computations, a company follows a similar overall combined company payroll count process. And if you thought it necessary to put in better controls, these counts could be made quarterly, or even monthly.
What makes this EJ&ITC particularly stimulating to US businesses is that the business adding employees will get not just an economic benefit, but also a highly desirable GAAP earnings increase, for this tax credit. And logically, this GAAP earnings increase will occur over each of the next 5 years, due to wise tax recapture provisions contained in the proposal. It effectively operates as a very desirable long-term effective income tax rate reduction for businesses.
Presently, there is also 100% first-year tax expensing for equipment purchases in the rest of 2011 and 50% first-year bonus tax depreciation for equipment purchases in all of 2012. I would keep these two provisions, but tweak them to make them much more effective job creators.
My proposal here is to allow the above faster tax depreciation only if there are also a sufficient number of net new jobs added in the period the equipment is placed in service. The Feds can decide the proper amount of accelerated tax depreciation to be permitted per net new job added.
Also, I would give all businesses a choice. They could either take the 100% first-year tax expensing in 2011 and the 50% bonus tax depreciation in 2012, or they could choose an upfront tax equivalent refundable tax credit, with the tax basis of the property purchased, for future tax depreciation purposes, dropping by the fair pretax amount.
When you combine this highly stimulative EJ&ITC with this 100% first-year tax expensing for the rest of 2011 and 50% bonus tax depreciation for 2012, particularly with the upfront tax credit equivalent option, you get an off-the-charts US economic surge, which is desperately needed.
So it sounds like a great program. It clearly will create a lot of jobs. But how do we pay for it?
Well, I think that under any reasonable fair CBO score, it more than pays for itself. How could that possibly be?
Well, for the handful of very large global US companies with Total Unremitted Foreign Earnings of $10 bil or more, I would let them earn the above computed EJITC only if it is also 100% paid for by a like amount of additional US federal income tax triggered by their foreign earnings repatriated to the US in the same period. I would consider granting these large global US companies an incentivized dividend received deduction of perhaps 20% to 30% on these foreign earnings repatriated used only to 100% fund their EJ&ITC.
For the many other smaller global US companies, I would give them a choice….they could either earn the EJ&ITC like pure domestic companies do, or they could instead elect to have it to be 100% paid for by a like amount of additional US federal income tax triggered by their foreign earnings repatriated to the US in the same period. I would consider granting these smaller global US companies a bit higher incentivized dividend received deduction of perhaps 40% or 50% on their foreign earnings repatriated used only to 100% fund their EJ&ITC.
In a fair CBO scoring, the above proposal should more than fund itself whenever it is enacted in a horrible job environment like the present one, where there is so very little private sector job increases, and where there are also expected to be so few private sector job increases over the next couple of years.
Under this EJ&ITC proposal, the bulk of the upfront tax credits granted by the US government will directly trigger substantial future incremental payroll tax receipts (both individual and company matched…15.3% of the higher gross payroll in total) and also substantial future incremental individual income tax receipts (probably average about 10% to 15% of the higher gross payroll) from the resultant payroll count increases.
The salient point here is that a company can't earn the tax credit unless it also increases its US full-time payroll count. Thus if the CBO counts the tax credit as a tax outflow, which it should, it also must count as a future cash inflow the higher incremental US federal government tax receipts that directly result from, and are inextricably linked to, the tax credit.
Because of the present very dismal private sector US job situation, there will be millions of new hires who previously wouldn’t be paying, or expected to be paying in the next couple of years, these federal taxes who now will be paying them due to this EJ&ITC proposal.
Thus, the CBO, in scoring this proposal, has to estimate the future amounts of these additional US federal tax receipts triggered by this proposal. Further, the CBO, in scoring this proposal, has to estimate the future amounts of US federal tax receipts due to the tax recapture aspect of this proposal.
Granted there will be some companies that will earn the tax credits even though they would have increased their number of full-time employees even without this proposal. However, there won’t be many of these, given the horrible private sector US job situation.
Further, under this proposal, all of the tax credits earned by the very large global US companies must be 100% funded by their additional US federal income tax related to their foreign earnings repatriated.
Also, under this proposal, the many smaller global US companies can elect to have some or all of their manufacturing tax credits 100% funded with the tax from their foreign earnings repatriated.
Thus, for all global companies funding their tax credits with the tax from their foreign earnings repatriated, there is no front end cost here to the US government at all.
And there is substantially positive CBO scoring here from the future incremental US federal government payroll tax receipts and US federal government income tax receipts, both caused by the US payroll count increases of these global US companies, triggered under this proposal.
In addition, there will be positive CBO scoring for the movement of the uninsured to insured status, since they will be added to full-time job status, many of them with a company-sponsored health care plan, due to this proposal. This positive scoring comes from the resultant reduction of the total US health care costs payable by the US Government, included in the Affordable Health Care legislation.
Also, there will be positive CBO scoring from the reduction in Unemployment Benefit payments made by the US Government, due to the reduction in the number of unemployed citizens, caused by this proposal.
Further, US States will significantly improve their financial coffers from this proposal.
First, they will be receiving additional corporate income taxes from the higher dividend income of the global US companies repatriating their earnings.
Second, they will be receiving higher individual income taxes from the new hires.
Third, they could elect to include this EJ&ITC as additional corporate taxable income, which triggers additional corporate income tax receipts.
And fourth, their Medicaid costs will drop due to the movement of the uninsured to insured status, resulting from their new full-time employee status.
When I rough out the numbers, given the horrible jobless recovery we now face, and which we will continue to face for at least the next couple of years, I get substantially positive CBO scoring from this proposal.
Thus, I would use some of this excess funding to also make a heavy dose of very wisely selected mix of infrastructure investments…..roads, bridges, schools, colleges, non-profit hospitals, governmental buildings, rails, sewers, airports, etc.
