Old Tax Relief Seen as Anchor in Obama Plan

Mr. Obama has signaled that he will propose to extend for another year a reduction of two percentage points in the 6.2 percent Social Security payroll tax that 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’ share.

In his prime-time address to a joint session of Congress, Mr. Obama is expected to call for a package totaling several hundred billion dollars that would also extend other business tax cuts, put federal dollars into building and repairing roads, rails, airports, schools and other infrastructure projects, 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 current 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 much-needed demand for goods and services from consumers and businesses and, additionally, of giving companies an incentive to hire.

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 Mr. Obama 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 Jan. 1.

Republican leaders have said they might support the payroll tax cut’s extension 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. Mr. Obama has said he will propose long-term deficit savings to offset the short-term costs of his stimulus proposals, though that is not likely to satisfy Republicans.

Mr. Obama previewed his argument 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,” Mr. Obama 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 Mr. Obama preferred in December when he and Congress’s 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. Mr. Obama countered with the broad-based and 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 programs keep money in people’s pockets that they quickly spend, whereas high-income taxpayers tend to save.

But Republicans oppose spending measures. In a letter to Mr. Obama on Tuesday, the House Republican leaders — Speaker John A. Boehner and Majority Leader Eric Cantor — said that continued high unemployment had vindicated their opposition to his 2009 stimulus package.

“As you know,” they wrote, “we argued at the time that a large, deficit-financed government spending bill was not the best way to improve our economic situation or create sustainable growth in employment.”

Nonpartisan analyses have found that the first stimulus package, which was roughly one-third tax cuts, did prevent unemployment from rising higher, and economic growth from being lower. Now many economists and analysts say the recovery needs further assistance, especially given the fallout from global economic problems; some have reduced their projections of economic growth because the earlier stimulus measures have ended or are about to, while Congress and the White House have been cutting spending to reduce deficits.

“We are looking at a substantial fiscal drag on the economy next year as the spending cuts take hold and state and local governments continue to contract,” said Karen Dynan, an economist at the Brookings Institution, a policy research organization. “If this tax cut expires, that’s going to take a lot of money out of people’s pockets and that is going to slow consumption substantially in the first part of next year.”

Letting the payroll tax cut for employees expire would shave a half-percentage point from economic growth in 2012, Moody’s Analytics has reported.

“The payroll tax cut is better than nothing, and letting it lapse without putting anything else in its place would certainly worsen our economic problems,” said Leonard E. Burman, a former Treasury economist now teaching at Syracuse University.

“But it’s far from ideal,” Mr. Burman added. “A lot of the money goes to higher-income people whose consumption is likely to be unaffected by the additional after-tax income. Even for lower-income people, if they save the money or use it to pay down debt, it doesn’t boost the economy in the short run.”

Still, said Donald Marron, director of the Tax Policy Center and a former economics adviser in the George W. Bush administration, “Relative to other things you could do on the tax side, it’s a pretty attractive stimulus.”

Also, Mr. Marron said, broad tax changes generally can mean a much bigger package in dollar terms than a spending initiative.

“It’s very hard on the spending side to identify any single lever that gets to that kind of scale, particularly over the period of a year,” he said. “So if you want to do something big, you almost inevitably have to do something on the tax side.”

That is especially true, he added, “when you layer on the political constraints” of Republicans’ opposition to spending.

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