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Which Tax Cuts are Best for the Economy?

With much chatter over the past week about the White House suggesting an employer-side payroll tax cut to stimulate the economy and hiring, let's look at what CEPR's Dean Baker (currently on vacation) said about the Schumer-Hatch employer tax credit for new hires that was in effect for much of 2010:

There has been extensive research on the impact of the minimum wage on employment, almost all of which finds that the 15-20 percent increase in the cost of labor that resulted from recent increases in the minimum wage have led to no measurable decline in employment. If a 15-20 percent increase in the cost of labor does not cause firms to cutback employment, then we can’t believe that the 6.2 percent decline in the cost of labor from the Schumer-Hatch bill will lead to any noticeable increase in employment.

Recently, the Economix blog in the New York Times noted about this policy:

Congress passed a temporary job creation tax cut last year that does not seem to have been terribly effective.

Remember:  That tax credit was for the full 6.2% in payroll taxes paid by employers, while the current idea being floated is for a cut of only 2%, so we can assume the effect would be even more miniscule.

Are there tax cuts that could work better?

Does the phrase "Making Work Pay" ring a bell?  At the end of last year, the Making Work Pay tax credit ended.  As CEPR's Shawn Fremstad pointed out earlier this year, that policy was more progressive than a payroll tax cut, providing greater relative financial relief to low-income and disabled workers, who are more likely to spend any extra money in their pockets than those with higher incomes.

And there's an employer tax credit for work-sharing, another idea from Dean Baker. The Nation magazine this week calls it one of The Five Smartest Congressional Bills You've Never Heard Of:

CEPR and Nicole Woo / June 15, 2011