The US unemployment rate is now close to 10 per cent and likely to stay that high all through 2010. Even if the economy begins to recover, job growth tends to be a lagging indicator. This is why the Obama administration is considering a tax credit for employers adding new jobs next year.
However, such a tax credit faces opposition on two grounds. First, employers may game the system to obtain tax credits for workers they would have hired anyway. Second, the cost of the tax credits may seem daunting in a time of rising budget deficits. Both critiques can be largely satisfied by proper design of a tax credit for new jobs.
To reduce gaming of the system, Congress should set as a baseline the level of a company's full-time employment on September 30 2009. To obtain the tax credit, a business would have to show full-time employment increased from that base. By setting the baseline in the past, Congress would avoid companies delaying the hiring of new workers or firing workers in order to rehire them to obtain the tax credit.