Munich Personal RePEc Archive

Tax Credits For Employment Rather Than Investment: A Comment

Grady, Patrick (1977): Tax Credits For Employment Rather Than Investment: A Comment.

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In an article in the American Economic Review, Jonathan R. Kesselman, Samuel H. Williamson and Ernst R. Berndt presented a Table showing the effect of substituting a marginal employment tax credit (METC)for the investment tax credit (ITC) over the 1962 to 1971 period. Their METC was defined in terms of a rate times the increase in the wage bi11 over a base defined to be the previous year's value.

Any base, including the previous year's wage bill base, is of course merely a proxy for what employment might be in the absence of a credit. However, needless to say, some bases are better than others. In this comment, it is argued that the previous year's level is an inappropriate way to define a base for a permanent METC that is directed at encouraging the long-run substitution of labour for capital. A better definition for a wage bill base would be something that does not ratchet up over time decreasing the value of the credit.

The paper also includes a few observations on the relevance of this analysis for the 1977 U.S. Job Credit which has a base as defined by Kessleman, Williamson and Berndt, but which is an explicitly temporary measure that will only be in effect in 1977 and 1978.

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