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Dunkelberg: Small Business Tax Credits Won't Create Jobs

The jobs numbers were lousy (as we predicted).

The Administration’s solution is small business tax cuts.

While this is a good idea in the long haul, it is not a solution to the short term problem.

Simple logic says you don’t hire a worker or invest in a piece of equipment that doesn’t pay for itself.

Economists teach this.

The top problem faced by small business owners today according to the National Federation of Independent Business is “weak sales” (not credit availability). Translation: new workers can’t produce enough sales to cover the cost of hiring them. New equipment can produce more output, but it can’t be sold, so capital spending projects wont pay for themselves.

Thus, hiring or buying new productive capacity would produce lower profits as the cost would exceed the revenue generated.

So, the basic problem is that resources can’t produce sufficient income to pay for themselves. This is true no matter how it is financed.

1. Tax cuts may give the firms more cash, but why would they spend it on employees or equipment that wont pay for itself? These “gifts” will still be invested only when the prospect of a payoff is good. It would be crazy to do otherwise.

2. Job tax subsidies make an employee cheaper for a short period but again the employee must be able to generate enough income to pay their way or the firm loses more money.

3. How about interest free loans? Nope, since the money must be repaid, why invest it in losing endeavors?

The Administration doesn’t understand basic business and the nature of the problems faced by owners. Consequently it designs “stimulus” programs that are counter-productive and wasteful of taxpayer money.

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William Dunkelberg is an Economic Strategist, Boenning & Scattergood and Chief Economist, National Federation of Independent Business.