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Today’s terrible job news only underscores the need for action on encouraging employment. However, the proposals being put forward by the White House of new spending or a continuation of the payroll holiday have little to zero chance of becoming law (unless significant concessions made to the Republican House).
Lawmakers in Washington need to decide do they want an issue for the elections or do they want to do something now to help the unemployed. To the goal of doing something today this column puts forward proposals that actually have a realistic chance of passing and can have a good impact on jobs and the economy (while not breaking the bank).Before President Obama and the Congress hop down the bunny trail of tax incentives designed to encourage job creation it’s perhaps useful to ask, “Where do jobs really come from?” (No, the job fairy doesn’t bring them.)
There are two key engines for job and economic growth: New businesses and (with obvious overlap) small and midmarket businesses. The importance of encouraging entrepreneurism and startups for job growth was underscored by an August 2010 NBER Working Paper, Who Creates Jobs? Small v. Large v. Young. (Spoiler alert: Young wins).
But the gas for those engines of jobs and economic growth is research and development (R&D) , improved technology and applying that new or improved technology to the work at hand (and fostering greater productivity). Innovation, R&D and greater productivity is especially vital if we are going to encourage manufacturing jobs in this country. Happily, studies have shown that encouraging new businesses goes hand-in-hand with spurring innovation.
Unfortunately, the main proposals being discussed in D.C. for tax incentives for job creation do little to nothing to help new, small and medium companies – and certainly not those innovative companies that are new, small or medium.
We can do better: Here are seven good ideas for job creating tax incentives — three to encourage investments in new business and four to foster and encourage innovation and productivity.
1. The Pryor-Brown 25% income tax credit proposal.
Senators Pryor (D-AR) and Brown (R-MA) have put forward legislation — The American Opportunity Act– which in a nutshell will provide a 25% federal income tax credit for investing in qualified small businesses, including companies in the advanced manufacturing, aerospace, biotechnology, clean energy and transportation sectors. Qualified small businesses can receive up to $2 million per year in tax credit-eligible cash equity investment, of which no more than $1 million can come from a single investor. (With a 25% credit, if any investor kicks in $1 million, he’ll get $250,000 in tax savings.)
While not perfect, this bill gets us going in the right direction. Payson Peabody who represents the Angel Capital Association (and my former colleague from the Senate staff) makes the right point that any tax incentive to be successful in encouraging new investment in this difficult economy must be significant. In addition, the incentive should not be limited by the alternative minimum tax (AMT); and should be targeted to businesses most likely to lead to job growth (meaning in high-growth and innovative industries as well as manufacturing); broadly applicable; and, not have a lot of hoops to jump through administratively.
2. The 100% exclusion for gains in small business stock.
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