The Jimmy Carter Jobs Credit

Stimulus Plan A didn’t work to create jobs or reduce unemployment. That was the $165 billion of tax rebates and money for states in February 2008.

Plan B flopped too. That was last February’s stimulus that has devoted $862 billion into mostly government programs. The unemployment rate climbed steadily until last month, and the main lasting impact has been nearly $1 trillion added to the national debt.

Now comes Plan C, another February stimulus, though this time everyone has been instructed not to use the “s word,” lest it scare the voters. This one is a “jobs bill,” as if Plans A and B were about something else. Don’t expect this one to work any better than the last two.

This latest Senate Democratic bill will cost $85 billion and is shaping up to be largely a rehash of last year’s stimulus: extended unemployment insurance, Medicaid cash for the states, and some public works spending. The one new twist is a proposal for a one-year $5,000 tax credit for small businesses for each new worker hired. President Obama calls the credit “the best way to cut taxes” to help small businesses.

But we’ve also seen this economic movie before—in 1977 under Jimmy Carter. During the two years it was in effect, a jobs credit worth about $7,000 in today’s dollars became a $20 billion free lunch as businesses claimed the handout for one of every three new employees.

In the short term, the Jimmy Carter jobs credit appeared to reduce unemployment. The jobless rate dropped by 1.2 percentage points (to 5.8% in 1979 from 7% in 1977). But that effect was short-lived, and when the subsidies ended two years later the layoffs resumed and the unemployment rate rose again and by 1980 was back to 7.2%.

Citing this not-so-happy experience, Wisconsin Democrat Ron Kind says the tax credit is evidence that Congress doesn’t “do anything new around here except the history we repeat.” The left-leaning Tax Policy Center recently looked at a proposal for a $5,000 payroll tax credit, which is similar in concept to the Senate jobs credit, and concluded that “The problem with subsidies such as this is that they are exceedingly sloppy. A lot of money goes to those firms that would have hired anyway.”

They’re right: The Labor Department reports that in December 2009 there were 2.5 million job openings. Will the government pay $5,000 for every one of these new jobs that would have existed anyway? In the dynamic American economy, thousands of workers are hired, fired or quit each day.

The President is trying to lure Republicans to support this policy as a “business tax cut.” But they should know that it violates sound tax principles. Pro-growth tax cuts, as adopted so successfully by JFK in the 1960s and Ronald Reagan in the 1980s, are broad-based and lower tax rates for as many people as possible. This reduces the distortions of the tax system, while permanently adding to the rewards for investment and risk-taking.

That’s the opposite of Mr. Obama’s tax strategy, which is to dole out special tax credits and loopholes for favored behavior or industries—hybrid cars, buying a new house, wind power—and then paying for these by raising tax rates on anyone making more than $200,000 starting next year. The result will be higher tax rates paid on a shrinking tax base, with a misallocation of capital toward projects chosen by politics rather than by prices or potential return on investment.

A 2009 study by the World Bank and Harvard University examined growth and entrepreneurship in 85 countries and found that lower tax rates on firms are powerful spurs to job growth and business start-ups. Perhaps Mr. Obama and Senate Majority Leader Harry Reid need a tax policy refresher from Dick Gephardt, Bill Bradley and other Democratic champions of tax reform from the 1980s.

Republicans and Democrats looking for a better way should call for a permanent reduction in the top personal and corporate tax rate to 25% to attract capital to the U.S. Making the current 15% tax rate on capital gains permanent, rather than raising it next year as Mr. Obama wants to do, would also help.

Recent surveys by the National Federation of Independent Business, the small business association, suggest that small employers don’t want tax credits. They want a future in which Congress and federal agencies stop imposing new tax and regulatory burdens. Given the damage done by the current Congress, doing no more harm would do far more to increase hiring than a reprise of Carternomics.