THE CENTREPIECE of the job-creation package that US president Barack Obama plans to announce today – payroll tax relief for workers and likely their employers – is neither his first policy choice nor that of many economists. But it is the one they figure has the best chance of getting Republicans’ support.
Obama has signalled that he will propose to extend for another year a reduction of 2 percentage points in the 6.2 per cent Social Security payroll tax employees pay, which means about $1,000 more for the average household. And he is considering a proposal to expand the tax relief to employers.
In his prime-time address to a joint session of Congress, Obama is expected to call for a package totalling several hundreds of billions of dollars that would also extend other business tax cuts, put federal dollars into building and repairing roads, railways, airports, schools and other infrastructure programmes and provide aid to states to avert more layoffs of teachers.
But the single biggest stimulus measure he will propose is likely to be temporary payroll tax relief. If the tax cut due to expire at the end of the year is expanded next year to employers as well as employees, it would pump roughly $200 billion into the economy, with the aim of stimulating demand for goods and services as well as giving companies an incentive to hire additional employees.
For the White House, its appeal is that it may be the only large stimulus measure that can pass Congress this year given Republicans’ preference for tax cuts.
And if Republicans oppose him, the White House figures Obama at least has the better of the political argument because he will be trying to block a tax increase that otherwise would apply to virtually all households on January 1st.
Republican leaders have said they would support the payroll tax cut’s extension only if its cost is offset by equal spending cuts, a condition they did not apply for extending the Bush-era tax cuts on high incomes.
Obama has said he will propose long-term deficit savings to offset the short-term costs of his stimulus proposals, although that is not likely to satisfy Republicans.
Obama previewed his argument this week, on Labor Day in Detroit, at one point addressing a raucous rally of union supporters as if he were speaking to Republicans.
“You say you’re the party of tax cuts? Well then, prove you’ll fight just as hard for tax cuts for middle-class families as you do for oil companies and the most affluent Americans,” the president said. Interrupted by applause and hoots, he continued: “Show us what you got. The time for Washington games is over.”
A payroll tax break was not the tax cut that Obama preferred in December when he and Congress’ Republican leaders first agreed to a stimulus package of tax cuts. He wanted to extend the “Making Work Pay” tax credit for low- and middle-income households, part of his original two-year stimulus package for 2009 and 2010. But Republicans, newly empowered by their big gains in the 2010 midterm elections, blocked him. Obama countered with the more costly payroll tax cut.
Both the administration and many economists, including those at the nonpartisan Congressional Budget Office, agree that some spending measures, in particular unemployment compensation and aid to states to avert layoffs, have more “bang for the buck” than many tax cuts – that is, for each dollar of cost to the federal government, more than a dollar is added to the economy’s output.
Generally, such programmes keep money in people's pockets that they quickly spend, whereas high-income taxpayers tend to save. – ( New York Timesnews service)