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Young Firms (and our Nation) Need a Payroll Tax Holiday

on February 01, 2010 Source: Policy Dialogue on Entrepreneurship

The unemployment pressure does not appear to abate. Layoffs continue every day and despite massive government intervention for economic recovery, there is little evidence of anything more than a slow, prolonged recovery. It is time to give a payroll tax holiday for young firms.

Different forms of hiring incentives to fight the jobs crisis have been proposed in Congress without much success to date. For example, Sens. Orrin Hatch (R., Utah) and Charles E. Schumer (D., N.Y.) proposed suspending payroll tax payments for companies that hire workers who have been unemployed for 60 days. President Obama in turn vowed in the State of the Union address last week to make small-business hiring a key piece in the jobs agenda, proposing tax credits for small companies that hire new workers or raise wages. He said that government should create the conditions necessary for businesses to hire more workers and that “we should start where most new jobs do – in small businesses, companies that begin when an entrepreneur takes a chance on a dream, or a worker decides it's time she became her own boss.”

President Obama should consider Carl Schramm’s approach to a hiring incentive. In his State of Entrepreneurship Address earlier this month, Schramm recommended creating an exemption from payroll taxes for companies less than five years old. Here is why such measure would be effective: in the past decades, firms less than five years old have accounted for all net job growth. Simply put, it is young, growing firms that really drive job creation, so the focus of any tax break for employers should be on these firms. The criteria to determine which firms will receive a tax break should be on firm age rather than size. To lessen the impact on the deficit even more, policymakers could implement the payroll tax holiday for young firms on a temporary basis.

When the goal is to contain unemployment, taxing job creation does not make much sense. History has showed that when new ventures grow, our entire economy benefits. Lowering the cost of hiring for young firms would be a smart policy to fight the jobs crisis. 

Jonathan Ortmans is president of the Public Forum Institute, a non-partisan organization dedicated to fostering dialogue on important policy issues. In this capacity, he leads the Policy Dialogue on Entrepreneurship, focused on public policies to promote entrepreneurship in the U.S. and around the world. In addition, he serves as a senior fellow at the Kauffman Foundation.

Category:  Tax Code  Tags:  hatch, schumer, obama, schramm

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