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How to Restore Animal Spirits and Reduce Unemployment: A Tax Credit for Employment Growth in Fiscal 2010 and 2011

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Returning to the 64.3% employment/population ratio of 1999-2000 would necessitate an 11+ percent increase in private sector employment in just two years (or a 13% increase in three years). A challenge for sure, but not impossible. Four times in the last 70 years, private sector employment has grown by more than 11 percent in just 24 months. Three of them were war related: entry into World War 2, demobilization after WW2 and entry into the Korean War. The peace time example was from January 1977 to January 1979 when private employment rose 11.5 percent. This two year period also set a 50 year record for percentage increase in total hours worked in the non-farm economy and for increases in the employment-population ratio. What caused such remarkable growth in 1977 and 1978? Answer: a generous TEMPORARY Federal tax credit for increases in employment above 102 percent of the firm’s 1976 level of employment. The Democratic Congress elected in 1976 arrived in Washington at a time of high unemployment, anemic (3.4% during 1976) employment growth and rising inflation due to the quadrupling of world oil prices in 1973-74. It responded with a temporary New Jobs Tax Credit (NJTC) for 1977 and 1978 that lowered the marginal cost of expanding a firm's workforce by roughly 15 percent on average (more for low wage and high turnover firms). Despite foot dragging by the IRS, one third of the nation’s private employers received NJTC credits that lowered their 1978 taxes by $3.1 billion. By the final quarter of 1978, capacity utilization had spiked, real output had increased 15 percent and unemployment had dropped from 7.8 to 5.9 percent. The expiration of the NJTC at the end of 1978 did not unravel these effects. During the next 12 months, output and employment continued to grow albeit at a slower pace and the employment-population ratio and unemployment rate were stable. The later 1980 and 1982-83 recessions were caused by the 160% increase in oil prices precipitated by the Iranian revolution & the Iran/Iraq war and the Federal Reserve response to inflationary consequences of the oil shock.

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New Jobs Tax Credit; employment; tax revenue; employment-population ratio; small business


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