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David McWilliams: Give employers a good reason to hire, not fire

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Tonight all over Ireland, people who employ other people will go to bed and the last thought in their heads will be: "Who will I fire tomorrow?"

What can we do to change that thought so that the last thought in their heads becomes: "Who will I hire tomorrow?"

Can the change of government change this conversation? How might this shift come about whereby the people who employ others -- the only people who can drag this economy upwards -- look more favourably on the idea of hiring an extra worker?

What we do know about economics is that people react to incentives. If you make it cheaper or profitable for people to do something, they will do it. By extension, as taxes are rising, if you make it tax efficient for people to do something, they will do it too.

If you doubt this, think about why we have ghost estates. We have them because our State made it tax efficient for a developer to build in the middle of nowhere on all classes of tax avoidance schemes. The reason we have so many car parks is because they were designed to allow people with large tax bills to avoid paying tax.

Why are the US multinationals here? Because we make it cheaper for them to be here rather than elsewhere because we charge them less tax.

Think about housing in general: by giving mortgage interest tax relief, the State jaundiced people's decisions about whether to rent or buy via a 'tax sweetener'.

This, of course, benefited the banks and the builders enormously. As well as being a form of corporate welfare for the financial and construction sectors, the State might also have had as an ideology a notion to create a home-owning democracy where having a house meant you had a stake in society. Whatever the reason for it, making it tax efficient to own houses led more people to buy houses than would otherwise be the case.

So we know in economics that people act in response to incentives. We also know people do the opposite. If you tax something to make it more expensive, those who were going to buy that thing, buy something else -- or don't buy at all.

Let's think about hiring a person. Who makes that decision? The person himself/herself who wants to be hired doesn't. Obviously they might make the best of themselves by improving their qualifications, but the problem about being on the dole is that you can't force people to value you.

But maybe we can do something else. Traditionally, many economists stress you can't interfere in the markets. I don't happen to believe that is the case, particularly when the market isn't working. If our objective is to reduce the level of unemployment, then make it easy to hire. How do you make it easy? You give a tax credit to the guy who wants to hire or who might be thinking of it. This is what we did with houses -- we gave a tax credit to build, so why not do it with our own people?

Why not give the prospective employer a personal or corporate tax credit to employ people? But where would we get the money to do this? Well here's a suggestion.

It may have escaped your attention in the blizzard of economic and financial news over the past two years, but Ireland lent the three most delinquent and bust banks an astonishing figure of €31bn in 2010.

If you add the interest costs over the proposed 15-year work out of the banking plan, the total cost to the Exchequer is estimated to be €58.55bn -- for more details on this see this link: http://bit.ly/diW1BW

Obviously, this is the worst sort of madness. But luckily there is an opportunity with a new government to change all this. A new government could decide to spend this money differently. Interestingly, for the main political parties who maintain that we stick to the EU/IMF plan, this borrowing has been given the green light by our 'partners'. We have issued a large promissory note in order to cover these losses. We could simply tear this up and begin the process of bank debt default.

We have no moral obligation to pay for the gambling debts of these institutions and therefore we do not have to. And this week key global financial players, such as George Soros, said we would be mad to pay this bill.

Interestingly, instead of wasting €3.9bn a year on these institutions, which is what it would cost us per year to pay the debts of these bust banks, we could put that money to work helping employers. Close Anglo, Irish Nationwide and EBS. Take away their banking licences. Then they will no longer be the Central Bank's problem; they will a problem for some liquidator somewhere.

Use the €3.9bn to give tax credits to employers to employ people. This sum would be worth €2,166 per employee in the country. If the money was ringfenced for smaller companies (that cannot engage in the accounting high jinks that the larger corporates can do to avoid tax) the figure per employee could be increased dramatically.

By doing this, we could increase the incentive to employ hugely. For every extra person an employer takes on, they get a tax credit. Surely this is better than giving the same employer a tax credit to build a car park?

In so doing, we change the game. The employer begins to ask the 'who will I hire tomorrow' question. This becomes a virtuous circle and the Government is simply transferring the incentive to invest away from buildings, car parks and houses and on to an incentive to invest in people.

We can therefore use the desperate situation of bailing out the banks to the advantage of the citizens and when potential employers go to bed, there will be a different, more optimistic thought on their mind.

David McWilliams has designed and will teach a new 10-week diploma in economics called 'Economics without Boundaries' starting February 14. See www.independentcolleges.ie

Irish Independent