September 29, 2020

You’re the Boss Blog: Business Owners Confront the Budget Impasse

She Owns It

Portraits of women entrepreneurs.

At the most recent meeting of the She Owns It business group, the conversation focused on the end of the payroll tax holiday, the impact of the federal budget impasse, and the challenges of implementing new technology.

Jessica Johnson, who owns Johnson Security Bureau, said many of her employees didn’t realize their paychecks would be 2 percent smaller when the payroll tax holiday ended in January 2013. As soon as they got their first checks of the year, the complaints began, she said.

“You’re taking my money!” they told her.

“No, we’re not taking your money, we’re withholding the proper payroll taxes according to the federal government,” she responded. “I would love to have a check for all that two percent that I’m withholding.”

“That’s funny, I haven’t had anyone say anything, and I know it affects people,” said Susan Parker, who owns Bari Jay.

Ms. Johnson is also thinking about the March 1 deadline for the federal government to agree on a budget, and how any decisions — or lack thereof — will affect her business. Cuts in government spending are a likely part of any plan, she said. “If the federal government doesn’t have the money,” she said, “then money won’t trickle down to the state level, which will mean that state and other municipal contracts that I have might be impacted.”

Beth Shaw, who owns YogaFit, asked what percentage of Ms. Johnson’s business these contracts represent.

“Less than 50 percent,” Ms. Johnson said.

“So, still significant,” Ms. Shaw said.

“Still significant,” Ms. Johnson agreed. But she added that her greater concern is the way in which cuts to various government programs, such as Section 8, the federally funded housing subsidy program, may affect her employees. “If somebody doesn’t get their Section 8 voucher, then will that mean I have homeless employees? And if you’re homeless, how can I expect you to go to work?” she asked.

“But there’s nothing you can really do about it,” Ms. Parker said. “First of all, you’re speculating as to what’s going to happen.”

“That’s true,” Ms. Johnson said.

“And second of all, even if that is ultimately what happens, what can you do to change it?” Ms. Parker asked.

“That’s a very valid point,” Ms. Johnson said.

“I feel like I’m throwing the towel in, but I don’t know what proactively you could do,” Ms. Parker said.

In the meantime, Ms. Parker is preoccupied with the new software her company has been trying to implement for more than a year. The customized Web-based software will run all of Bari Jay’s operations, including invoicing and order entry. Ms. Parker said she paid the software design firm $36,000 during the early stages of the project, and “tens of thousands on top of that for data conversion.” Additionally, beginning in November, when the software design firm began testing the system with Bari Jay’s live data — like the actual number of dresses it will produce — Ms. Parker has been paying a monthly fee of $2,000.

“It’s so frustrating I don’t even know where to begin,” she said. “I was supposed to be on this software a year and change ago.” The software design firm initially thought the job would take three months. Finally, they are close to “going live,” Ms. Parker said. She thinks that should happen within a month. But, she said, “I know once we’re live, a whole new slew of problems are going to come about.”

Deirdre Lord, who owns the Megawatt Hour, agreed there will be challenges.

“How do you implement something new or make a major change and have the course of business continue?” Ms. Parker asked. “It doesn’t have to be a new software system, it could be any major change.” Further complicating matters, the changeover will now have to take place during her busiest time of year.

“Can you run the two systems in parallel for a period of time?” Ms. Lord asked.

Ms. Parker said the systems were running in parallel now as the new one is tested , but once the new one goes live, the old one will shut down. The group also wondered what, exactly, has caused the delays.

Ms. Parker explained that when she began the process she spoke with multiple software companies — all of which assured her they handled work for garment companies. “But the bridesmaid business is so different from almost any other garment company out there,” she said. For example, her dresses are made to order — a dress may come in three different colors and the customer can choose whichever she wants.

“How many S.K.U.‘s” — or products for sale — “do you have?” asked Ms. Shaw.

“I couldn’t even tell you,” Ms. Parker said. A dress may have three different colors, and a customer might have 30 colors from which to choose, she said. “I mean what’s 30 times 30 times 30?” she asked. And that’s just one style out of hundreds.

Most garment industry software systems run on S.K.U. numbers, Ms. Parker explained. Because Bari Jay has so many, the programs tend to crash. The good news is that her new system hasn’t been crashing while on trial.

But that was just one challenge. Other issues arose from the high level of customization her business required. With the exception of bookkeeping, everything had to be tailored, including accounts payable and accounts receivable.

Ms. Lord said Ms. Parker should prioritize the issues her software company must address, and give it a time frame for each.

Ms. Parker said invoicing, production, and order entry were the most critical functions. If those work, Bari Jay can deal with other issues. At the moment, she said, order entry works, production works, and invoicing “mostly works.”

Again, Ms. Lord said, “You need to create some way of prioritizing problems around the business issues so they can be responsive.”

“I understand what you’re saying,” Ms. Parker said.

“You need almost a service-level agreement that commits them contractually to solving certain problems in a certain priority order,” Ms. Lord said.

“So, if it’s a production or an invoice thing, they have to do it immediately, whereas if it’s something else they can get to it whenever,” Ms. Parker said.

“And then there’s a penalty associated with missing those goals,” Ms. Lord said.

“I actually really like that idea,” Ms. Parker said.

While Ms. Parker can’t rewrite the agreement at this stage, she knows the software company is eager to get her new system up and running. Doing so will enable it to pursue other clients in the bridal industry. “I could say, ‘You want to go live? Well this is what I need from you,’ and I think I might get them to agree to it,” she said.

You can follow Adriana Gardella on Twitter.

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Budget Cuts May Stall Economic Growth

The cuts — a result of a policy known as sequestration — most likely would reduce growth by about one-half of a percentage point in 2013, according to a range of government and private forecasters.

That could be enough to again slow the arrival of a recovery, producing instead another year of sluggish growth and high unemployment.

Such economic forecasts are even cloudier than normal because of uncertainty about the cumulative impact of the rounds of federal spending cuts and tax increases in the last few years. Whether the government’s repeated flirtation with fiscal turmoil is causing businesses to postpone or reduce planned investment is also unclear.

Some evidence suggests that companies, particularly in the military industry, cut investment last year in anticipation of sequestration, which was originally scheduled to begin Jan. 1.

The Commerce Department estimated that the economy shrank slightly in the fourth quarter.

Consumer spending remained relatively strong last year, but may have weakened early this year after an increase in payroll taxes, part of a deal to avoid the worst of the fiscal cliff tax increases and to delay its spending cuts.

“Where are all the customers? And where’s their money?” a Wal-Mart executive wrote in a February e-mail obtained by Bloomberg News, bemoaning a sharp decline in sales. Wal-Mart sales accounted for more than 2 percent of domestic economic activity in recent years.

Many economists are particularly critical of the arbitrary nature of the cuts, arguing that Congress could reduce annual deficits by the same amount with far less economic damage by spreading the cuts across a broader range of programs, directing them at lesser priorities or giving government agencies more discretion in how they make them.

“There’s a better way to do this,” said Joel Prakken, chairman of Macroeconomic Advisers, a forecasting company based in St. Louis. Still, he and others emphasized that the impact would most likely not be nearly as bad as the cost of the tax increases and spending cuts that had been scheduled to take effect Jan. 1.

“Even though it’s bad policy, the macro effects are small compared with going over the fiscal cliff,” he said. “That was a recession. This is a deceleration.”

The cumulative effect of the sequester and the tax deal struck in January might slash economic growth by as much as 1.25 percentage points — from a growth rate that otherwise might have been more than 3 percent — in 2013, economists estimate. Mr. Prakken predicts that the economy still would grow at about the same 2 percent annual pace it has managed in the years since the recession.

Sequestration would slash agencies’ “budget authority” by about $85 billion, but the Congressional Budget Office this month estimated that actual outlays would fall by only about $44 billion in the 2013 fiscal year, with the rest accruing over time. That is still about 1 percent of total federal spending to be squeezed out in a matter of months.

Many economists argue that the same cuts could be made with less pain by postponing some of them until later in the decade, when the economy is likely to be stronger. Many argue that growing spending on health care programs like Medicaid and Medicare is the real threat to the federal budget, not domestic spending on areas like education and support for poor families.

They also argue that macroeconomic estimates of the impact on growth probably understate the damage that will be caused by cutting spending indiscriminately.

“It’s the nature of the cuts that is most pernicious — across-the-board, without thought, cutting everything and anything including programs everyone thinks are good and effective,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s impossible to calculate in terms of dollars and cents what you’re doing when you have these mindless cuts.”

The cuts would begin to take effect by March 1, and Congressional leaders appear increasingly resigned to let the deadline pass without action.

A broader deal is possible before a second deadline at the end of the month, when a budget deal is necessary to avoid a government shutdown. Any such deal could significantly reduce the economic impact of sequestration, which forecasters project will mostly fall in the second and third quarters.

In normal times the Federal Reserve could offset the impact of spending cuts by reducing interest rates. But these are not normal times. The Fed already is engaged in a vast effort to stimulate the economy, using monetary policy to suppress interest rates. The Fed’s chairman, Ben S. Bernanke, has warned repeatedly that such policy has limited power to offset additional cuts.

Some politicians are warning that agencies will need to take steps like furloughing air traffic controllers or shrinking early childhood programs.

“We are doing everything possible to limit the worst effects on D.O.D. personnel, but I regret that our flexibility within the law is extremely limited,” said Leon E. Panetta, the defense secretary, in a letter to his staff on Wednesday. “We have no legal authority to exempt civilian personnel funding from reductions. As a result, should sequestration occur and continue for a substantial period, D.O.D. will be forced to place the vast majority of its civilian work force on administrative furlough.”

While the cuts would take a modest toll on the overall economy, the pain would be concentrated in some areas, like the Washington suburbs that are home to many federal workers and government contractors.

“Sequestration would feel like a cold to most of the nation, but to Prince George’s County and the rest of the Washington metropolitan area, it would feel like a bad case of pneumonia,” Rushern L. Baker III, the executive of Prince George’s County in Maryland, said on Tuesday in a statement issued with the leaders of neighboring counties.

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Restored Payroll Tax Pinches Those With the Smallest Checks

Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.

Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.

While these data points are preliminary — more detailed statistics on retail sales and other trends will not be available until later this month — at street level, the pain from the expiration of a two-percentage-point break in Social Security taxes in 2011 and 2012 is plain to see.

“You got to stretch what you got,” said Mr. Phillips, 51, a front-desk clerk and maintenance man for a nonprofit housing group who earned $22,000 last year. “That little $20 or $30 affects you, especially if you’re just making enough money to stay above water.” So he has taken to juggling bills, skipping a payment on one this month and another next month.

“I’m playing catch-up each month,” he said. “You go to the supermarket and you can’t spend what you used to.”

Jack Andrews has it slightly better than Mr. Phillips. He earns a bit more than $40,000 a year manufacturing ceramics in a local factory, but because his wife, Cindy, is disabled, he is the sole breadwinner. Something had to give now that he is earning about $800 less a year, or $66 a month, and it was the couple’s monthly night out.

“It’s just gotten out of reach,” Mr. Andrews said.

The tax break, which was pushed by the White House to stimulate spending in 2011 and extended in 2012, was always supposed to be temporary. But with pressure building in Washington to reduce the deficit and politicians fighting bitterly over whether to raise taxes on the very rich, the question of how the increase in Social Security taxes would affect the poorest workers did not seem to garner much debate on either side of the aisle.

“I don’t see any reason to consider supporting its extension,” said Timothy F. Geithner, the Treasury secretary, in testimony last year. Even Nancy Pelosi, a reliable liberal who leads the Democratic minority in the House of Representatives, was for letting it expire.

The higher rate applies to all earned income up to $113,700. For a household earning $100,000 a year, the two-percentage-point increase means an additional $2,000 a year in payroll deductions. Economists estimate that the payroll tax increase will reduce disposable income by about $120 billion and shave half a percentage point from economic growth in the first quarter — a significant blow given that the economy is expected to expand only 1 to 2 percent in the first half of 2013.

“If you wanted to design a policy to squeeze the spending of lower- and middle-income households, raising the payroll tax is the way to do it,” said Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors. “It’s very regressive.”

Retailing analysts and economists say high-end earners will largely be spared.

“I wouldn’t expect it to have much of an effect on BMW consumption,” said Richard H. Thaler, a professor of behavioral science and economics at the University of Chicago’s Booth School of Business. “The people who will notice it the most are the ones making the least.”

In Medford, Ore., Darchelle Skipwith had to scrap her monthly budget and start over when the law changed.

She is buying less meat; driving less often to see her sister, who lives 12 miles away in Eagle Point; and putting less away in savings. In August, Ms. Skipwith, 42, hopes to get a raise of 50 cents an hour at her job stacking shelves at Walmart, which should help make up the difference.

For now, she has no choice but to change her daily routine.

“I added it up — it’s about $75 a month,” Ms. Skipwith said. “That’s not a lot for some people, but mine is the only paycheck. I don’t have extra money coming in.”

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Economy Ended the Year on an Upbeat Note

The United States economy ended 2012 on a surprisingly sound note as factory output increased and low inflation lifted the buying power of consumers, signaling that the economy may weather this year’s higher taxes.

Manufacturing output rose 0.8 percent in December, the Federal Reserve said Wednesday, a day after retail sales figures pointed to robust consumer spending last month.

“There is every indication that the improvement may be a reflection of a broader pickup in overall economic activity,” said Millan Mulraine, an economist at TD Securities in New York.

The increase in demand for goods appears unlikely to derail the Federal Reserve’s easy monetary policy soon, given the lack of inflation. The Labor Department said consumer prices were flat in December, restrained by a decline in gasoline prices.

That is good news for consumers still smarting from the 2007-9 recession. Weekly earnings rose 0.6 percent last month when adjusted for inflation, the department said.

The earnings increase means family budgets started this month on slightly better footing as payroll taxes rose for all workers and the wealthiest Americans faced higher income taxes.

The tax increases, enacted to reduce the federal budget deficit, are expected to restrain consumer spending through June. Some economists predict higher taxes will subtract a percentage point from economic growth this year.

American financial markets were little moved by the data, although the increases in factory output and real earnings beat the forecasts of analysts polled by Reuters.

Gains in manufacturing appeared broad, tempering the view that some of the growth resulted from a temporary rebound after Hurricane Sandy upset many lives on the East Coast in late October and early November.

The output of motor vehicles and parts jumped 2.6 percent, while production of machinery gained 0.6 percent. Factories made 1.5 percent more computers and electronics. Industrial production rose 0.3 percent.

Still, the data offered a reminder that the trend in factory output, like the broader economy, remains lackluster. Output of consumer goods fell 0.1 percent from November, and overall manufacturing gained by only 0.2 percent in the fourth quarter when measured at an annual rate.

“The manufacturing sector is just about keeping its head above water,” said Paul Ashworth, an economist at Capital Economics in Toronto.

Wednesday’s consumer price data reinforced the view that inflation will not reach the Fed’s 2 percent threshold soon.

“This leaves Ben Bernanke and the Fed with a free hand to continue with ultra-accommodative monetary policy,” said Michael Woolfolk, a currency strategist at Bank of New York Mellon.

The Fed has kept interest rates near zero since late 2008 and has bought about $2.5 trillion in assets to stimulate economic growth and get Americans back to work after the recession.The Fed uses a separate index of inflation that tends to run cooler than the Consumer Price Index. By either measure, annual inflation remains below the Fed’s threshold..

In the 12 months to December the price index increased 1.7 percent, the smallest increase since August. A measure of core prices, which strips out volatile food and energy prices to give a better sense of inflation trends, was up 1.9 percent.

The Fed’s latest beige book, a collection of anecdotal information on regional economic conditions, showed mild growth across the United States in recent weeks but it indicated no likelihood that economic expansion would accelerate.

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Today’s Economist: Simon Johnson: The Supreme Court and the Next Fiscal Cliff


Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The end of the 2012 fiscal cliff drama was largely predictable. Faced with the prospect of large and immediate tax increases, Congress acted to raise income tax rates only on relatively well-off people — and also to allow payroll taxes to increase for all working Americans. The messy compromise raises revenue, although it does not bring our medium-term deficits under control, and it is unlikely to push the economy back into recession.

Today’s Economist

Perspectives from expert contributors.

Unfortunately, the legislation that passed the Senate late on New Year’s Eve and the House on Jan. 1 sets up another fiscal-cliff-type experience – with a fight over extending the debt ceiling looming in about two months. And the outcome then could well be a significant slowdown in the economy and a struggle that might end up in front of the United States Supreme Court.

About the end of February, the Treasury Department will have exhausted its legal authority to borrow. Congressional authorization will be needed to allow additional federal government debt to be issued; this is the debt ceiling.

The last time the United States came close to hitting the debt ceiling, in summer 2011, a game of chicken was played on Capitol Hill and with the White House – with many Congressional Republicans insisting that the debt ceiling would not be extended unless there were matching spending cuts.

This led to the Budget Control Act of 2011, which created the now-infamous sequester mechanism: if politicians could not agree on ways to limit spending (and raise taxes), automatic spending cuts would kick in for both domestic and military programs of the government.

Under the New Year’s Day legislation, this sequester was postponed until the end of February.

So the next fiscal cliff includes both hitting the debt ceiling and carrying out the sequester. By itself, the sequester will cause government spending to fall in an arbitrary and inefficient manner. This will slow the economy to some extent.

But the greater danger is that world markets will be plunged into chaos when the debt ceiling is not extended, because this creates the prospect that the United States government will be unable to make payments on its existing obligations unless it breaks the law or makes vast spending cuts.

Using the debt ceiling in budget negotiations is a dangerous and irresponsible tactic. In summer 2011, financial markets were severely strained by the prospect that the United States would not pay its debts. This pushed up yields on risky debt around the world (including in Europe) and caused the stock market to fall almost everywhere.

Yet House Republicans seem willing to play the same card again unless they get large cuts to domestic discretionary spending by the federal government (or perhaps big cuts to Medicare, which is part of what they were asking for in 2012). The Obama administration and most Democrats will refuse to agree. Another showdown will loom.

In think about likely scenarios, you need to assess what the Supreme Court might do if it were to take center stage on the debt ceiling.

While the Tea Party movement is greatly weakened, it may still be strong enough to block any extension of the debt ceiling. If that were the case, an impasse with a great deal of impassioned rhetoric would result.

At the end of the day, the administration would probably break the debt ceiling and take its case to the Supreme Court. While the court’s ruling on the constitutionality of the Affordable Care Act was a significant moment in summer 2012, any decision on the debt ceiling would be much more important. We haven’t seen a court decision with that kind of potential macroeconomic impact since the 1930s (when the legality of suspending the gold standard was reviewed).

Many legal arguments will be heard, and in the end the Court is likely to be swayed by an assessment of the potential implications. If the government has already broken the debt ceiling, determining that this is unconstitutional would cause chaos for the United States and the global economy. As in the 1930s, the court would not want to second-guess the macroeconomic decisions of the administration, I hope.

Whatever the Supreme Court outcome, going down that route would create a great deal of uncertainty – and is likely to affect some investment and consumption decisions and to slow the economy enough to create a new recession.

For a specific quantitative measure and a great deal of helpful thinking on this issue, I recommend the work of Nicholas Bloom of Stanford University (with Scott R. Baker of Stanford and Steven J. Davis of the University of Chicago) on their general Web site and in their most recent paper, updated this week.

Their Economic Policy Uncertainty Index shows a big spike on the debt ceiling dispute in August 2011. We will face a comparable or even larger effect in early 2013. So the question for our politicians will be: whom do they think will be blamed for creating such an uncertainty-induced recession?

Based on its experience in 2012, the Obama administration will feel that it does well by standing up to the Republicans on fiscal issues (although some Democrats, of course, wanted to take an even stronger line). I do not see the two sides coming together on spending issues, so I expect a version of the sequester.

The Republicans are obviously divided on fiscal policy and many other issues; one is how extreme they want to be perceived to be relative to mainstream opinion.

Most likely the Tea Party faction will dig in deeply, as it did on Jan. 1, when the fiscal legislation passed the House with support from most Democrats and enough Republicans who were willing to vote with the administration (and the Senate). This is, of course, a sharp contrast to what happened at the start of President Obama’s first term, when all the House Republicans, without exception, voted against the fiscal stimulus package.

The Republicans will split, but more of them are likely to side with the Tea Party movement than was the case this week. We are headed directly for another fiscal-cliff confrontation – and this one could be much more damaging.

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Economix Blog: Capital Gains: Romney and the 1%

Few aspects of the division between the 1 percent and the 99 percent have proven so divisive as the fact that the rich often pay a lower tax rate than everybody else. That is because the top federal tax rate on capital gains income is 15 percent, compared with a top marginal tax rate of 35 percent on other taxable income, like wages and salaries, that exceeds $380,000 a year.

The 1 Percent

Looking at the top of the economic strata.

Mitt Romney, the Republican presidential candidate, who has declined to release his tax returns, acknowledged on Tuesday that his own tax rate was “probably closer to the 15 percent rate,” because much of what he earns is from investments. The rich earn far more from capital gains than everyone else. The percentages fluctuate from year to year, but in 2007, the top 1 percent of earners received 20 percent of their income from capital gains, while everyone else received, on average, 2 percent of their income from capital gains. In 2011, according to estimates by the nonpartisan Tax Policy Center, the top 1 percent paid 70 percent of the total federal tax on capital gains.

The center also estimates that the top 1 percent, of which Mr. Romney is a member, pays an effective income tax rate of 18.5 percent, compared to 9.5 percent for the population as a whole. But when it comes to payroll taxes, the rich pay a far lower effective rate than everyone else – 1.7 percent compared to 7 percent – because the income subject to payroll taxes is capped at $107,000.

Mr. Romney might manage to largely avoid payroll taxes, except for those on the $374,000 he makes in speaking fees, said Roberton Williams, a senior fellow at the Tax Policy Center, and he might deduct large amounts for charitable contributions. “Trying to figure out what taxes he actually pays without seeing his tax return is very difficult,” he said.

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Democrats See Advantage in Payroll Tax Debate

With Mr. Obama leading the charge in Washington and political swing states, Senate Democrats have put proudly antitax Republicans in the position of opposing a tax cut for more than 160 million mostly middle-class Americans because they object that it includes a tax on about 350,000 people, those with more than $1 million in annual taxable income.

Votes late on Thursday left the issue at an impasse. The Senate voted 51 to 49 for Democrats’ measure to further reduce Social Security payroll taxes next year for both workers and employers and to impose the surtax, but the tally was short of the 60 votes needed. One moderate Republican, Senator Susan Collins of Maine, supported it. A Republican alternative, which would have extended the current more modest tax cut and slashed the federal payroll to pay for it, was rejected 78 to 20, with more than half of Republicans opposed.

The maneuvering suggests that the parties will agree to some continued relief before the current payroll tax cut expires on Dec. 31. But how much of a cut and how — or if — it will be paid for remain to be settled, with some in both parties saying that the tax break would further weaken the Social Security system’s financing.

But politically, Democrats believe that they have already won this latest skirmish in the message wars. And some exasperated Republicans acknowledge that they are losing the exchange; party leaders have worked this week to bring the rank and file in line behind the tax cut.

Democrats have concluded from the payroll tax debate that Republicans are vulnerable over their opposition to any new taxes on the wealthy in a way they were not when Democrats proposed such taxes for deficit reduction. So they have reprised an old message — that Democrats fight for the middle class, Republicans for the rich — and are likely to sound it through 2012, in hopes of blunting the headwinds they face as unemployment remains high.

“Tonight, Senate Republicans chose to raise taxes on nearly 160 million hard-working Americans because they refused to ask a few hundred thousand millionaires and billionaires to pay their fair share,” Mr. Obama said in a statement after the first Senate vote.

It was the same message he delivered on Wednesday, in anticipation of the Senate action, both in speeches to a crowd in blue-collar Scranton, Pa., and later to affluent donors in New York. In Scranton, speaking as if to Republicans, he asked, “Are you willing to fight as hard for middle-class families as you do for those who are most fortunate?  What’s it going to be?”

Mr. Obama, in setting this debate in motion in September, when he introduced his job-creation plan, has tapped into the widespread sense of income inequality — fighting for “the 99 percent” — that gave rise to the Occupy Wall Street movement. But Democrats would not be in their current strong position but for the fact that Republicans, for the first time in memory, contested a tax cut and then insisted that the reductions be paid for.

“This would have been unheard of even six months ago,” said Senator Charles E. Schumer, Democrat of New York. “But we are changing the debate, and the public is with us.”

Mr. Schumer read to reporters from, a Web site popular among conservatives, where a blogger, Erick Erickson, wrote, “I never thought I would see the day, but Democrats are outmaneuvering Republicans on a tax cut.”

“Like clockwork, the G.O.P. is throwing the ball into the Democrats’ basket for them,” Mr. Erickson said.

Republican leaders’ struggle this week to find a strategy that could unite their party reflected the political bind it is in. Nearly 7 in 10 Americans said the policies of Republicans in Congress favored the rich, a New York Times/CBS News poll found in October.

In a memo to Senate Democrats last week, the party pollster Geoff Garin cited other recent surveys to argue that concern about income inequality and the perceived decline of the middle class is trumping the antigovernment fervor that defined last year’s Congressional midterm election and allowed Republicans to take control of the House. He said that sets up a 2012 election that is fundamentally different.

Robert Pear and Jennifer Steinhauer contributed reporting.

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Shares Decline Sharply Amid Uncertainty

In afternoon trading, the three main market indexes had fallen about 2 percent. The Standard Poor’s index of 500 stocks and the Dow Jones industrial average were each down about 2.3 percent, and the Nasdaq composite index was down 1.9 percent.

Stocks in the United States followed Europe, where the European Central Bank said Jürgen Stark, a German who sits on the executive board of the E.C.B. and is known as an opponent of the bank’s bond-buying program, will resign his post.

The DAX in Germany fell 4 percent. The FTSE 100 in Britain closed down 2.4 percent. The Euro Stoxx 50 index was down 4.2 percent and the CAC 40 index in France was down 3.6 percent.

Paul Ballew, a former Federal Reserve economist and now chief economist at Nationwide, said short-term interest rates in Greece were reflecting increased uncertainty in Europe as well as speculation over whether there would be adequate restructuring in that nation’s economy to address its problems.

There was also evidence of a flight to safety among investors, in which they shed stocks for bonds. Yields on Germany’s 10-year bonds declined, and the United States Treasury’s 10-year note yield fell to 1.93 percent, from 1.98 percent late Thursday, after touching a low of 1.89 percent. “Issue number two is the continued anxiety in the United States that the recovery continues to stall, and that we will not be getting growth as strong as we would need in terms of corporate profits,” said Mr. Ballew.

“Even yesterday’s speech raises questions of whether there will be support for fiscal policy,” he said about the president’s jobs address.

Mr. Obama’s plan focused on generating jobs and included a number of tax cuts and spending proposals, like an extension and expansion of the cut in payroll taxes and a tax holiday for small businesses for hiring new employees. The president was to send a detailed proposal to Congress in a week.

Mr. Ballew said that questions persisted about how much of the proposal would pass.

In addition, investors were considering whether fiscal or monetary policy could come to the rescue of the economy as they await the Federal Reserve policy meeting later this month. Stocks were sharply lower on Thursday after the chairman of the Federal Reserve, Ben S. Bernanke, gave no new signs that there would be fresh stimulus measures.

“If you are in the market right now, you’ve got uncertainty on top of uncertainty on top of uncertainty,” Mr. Ballew said. “You have got a pretty toxic mix.”

The stock declines on Friday set the markets on track to extend their year- and month-to-date declines. And Clark Yingst, the chief market analyst at Joseph Gunnar, said that the fall of the euro against the dollar on Friday, resulting in a six-month low, suggested that the broader market as measured by the S.P. 500 had not yet completed its recent correction.

He said a rally earlier in the week in stocks was partially in anticipation of Mr. Bernanke’s and Mr. Obama’s speeches, and their possible policy tools that could be in the making.

“The market just doesn’t believe that it is going to be passed by that Republican house,” Mr. Yingst said of Mr. Obama’s speech.

He noted that the United States bond’s 10-year price recently touched record highs, with the yield lower than where it was in the midst of the global financial meltdown, 2.055 percent in December 2008.

“It is an indication that bond investors clearly see a significant slowdown in the U.S. economy,” he said, “and bond investors think it is going to remain very slow, very sluggish.”

Jack Ewing contributed reporting from Frankfurt.

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Obama Calls for Jobs Plan with Payroll Tax Cut

Speaking to a joint session of Congress, Mr. Obama ticked off a list of measures he said would put money in people’s pockets, encourage companies to begin hiring again, and jolt an American economy at risk of relapsing into recession. And he all but ordered Congress to pass the legislation.

“You should pass this jobs plan right away,” the president declared.

With Republicans already lining up to condemn the plan, Mr. Obama said, “The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy.”

Though Mr. Obama’s proposals were widely expected — an extension and expansion of the cut in payroll taxes; new spending on schools and public works projects; and an overhaul of unemployment insurance — the overall package was considerably larger than expected, with an estimated $447 billion in stimulus money.

While Republicans did not often applaud Mr. Obama’s plans, party leaders greeted his proposals with a degree of conciliation. “The proposals the president outlined tonight merit consideration,” Speaker John A. Boehner said in a statement. “We hope he gives serious consideration to our ideas as well.”

The president’s plan is comparable to the two-year $787 billion package pushed through by Mr. Obama in 2009, because senior administration officials said the bulk of this stimulus would flow into the economic bloodstream in 2012.

The centerpiece of the American Jobs Act is an extension and expansion of the cut in payroll taxes, worth $240 billion, under which the tax paid by employees would be cut in half through 2012. Smaller businesses would also get a cut in their payroll taxes, as well as a tax holiday for hiring new employees.

Mr. Obama said a typical household would benefit to the tune of $1,500 next year.

“I know some of you have sworn oaths to never raise any taxes on anyone for as long as you live,” he said.  “Now is not the time to carve out an exception and raise middle-class taxes, which is why you should pass this bill right away.”

But he also repeated his long standing position that the wealthiest Americans and biggest corporations should “pay their fair share” — in other words, that corporate loopholes should be closed and the Bush era tax cuts on the wealthiest not extended yet again.

“Should we keep tax loopholes for oil companies?  Or should we use that money to give small business owners a tax credit when they hire new workers?  Because we can’t afford to do both,” he said.  “Should we keep tax breaks for millionaires and billionaires?  Or should we put teachers back to work so our kids can graduate ready for college and good jobs?  Right now, we can’t afford to do both.”

These are questions that will be hard fought this spring as Congress hammers out the second phase of the summer budget deal that headed off the prospect that the government’s borrowing power would reach its limit.

Mr. Obama insisted that everything in the package would be paid for by raising the target for long-term spending cuts to be negotiated by a special Congressional committee. He did not detail his arithmetic, which White House officials said would hinge on how much of the plan gets through Congress.

“There should be nothing controversial about this piece of legislation,” Mr. Obama said in his prepared remarks. “Everything in here is the kind of proposal that’s been supported by Democrats and Republicans.”

After a summer consumed by a bitter debate between the White House and House Republicans over how to reduce the federal debt and deficit, Mr. Obama kept his focus Thursday squarely on the need to create jobs. He acknowledged that the government’s role in fixing the problem was limited.

“Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers,” he said. “But we can help. We can make a difference. There are steps we can take right now to improve people’s lives.”

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Economix: Are Taxes High or Low? A Further Look

Today's Economist

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served
on the staffs of Representatives Jack Kemp and Ron Paul.

A couple of weeks ago, I discussed the low level of federal taxes as a share of the gross domestic product in the United States, both historically and in comparison with other developed economies. I noted that total federal revenue — income, corporate and payroll taxes combined –– has been below 15 percent of gross domestic product for three years in a row, its lowest level since 1950 and well below the postwar average of about 18.5 percent of G.D.P.

Judging by their comments, a great many readers were incredulous. For years, Republicans have told them over and over again that taxes in the United States are exceptionally high and the primary obstacle to growth, and that a huge tax cut would do more to raise growth than any other policy.

For example, former Gov. Tim Pawlenty of Minnesota, a candidate for the Republican presidential nomination, has proposed reducing the top statutory income tax rate on individuals to 25 percent and abolishing the taxation of interest, dividends and capital gains. The Tax Policy Center estimates that this plan would reduce federal revenues by $8 trillion over the next decade.

Governor Pawlenty contends that unprecedented growth will result — to such an extent that there will actually be no revenue loss at all.

I am not picking on Governor Pawlenty; all of the candidates for the Republican presidential nomination support similar policies, and not one has criticized him for making outlandish claims. Rather, I want to emphasize how widespread the view is, at least among Republicans, that Americans are overtaxed.

A common criticism of my earlier point about federal taxes as a share of G.D.P. is that I ignored marginal tax rates — the tax on each additional dollar earned — and the payroll tax, which is the largest tax that most people pay. Of course, I did not ignore the payroll tax; it is part of total federal revenues. But the point about marginal rates is worth exploring further, since economists agree that this is often the most important tax rate for economic decision-making.

The Tax Policy Center annually calculates average and marginal tax rates for four-person families with the same relative income. It starts with the median income, which is the exact middle of the income distribution, with half of all families above and half below. It then calculates tax rates for those with half the median income, a common definition for the working poor, and twice the median income, which would represent the reasonably well-to-do.

The table below shows the average and marginal tax rates for each of these families since 1955, including both federal income taxes and the employee share of payroll taxes.

sources: Treasury Department, Tax Policy Center

As one can see, average tax rates on the working poor have never been lower; in fact, they pay neither income taxes nor the employee’s share of the payroll tax, because the earned income tax credit offsets both and even gives them a small refund on top.

However, the tax credit is phased out at a rate of 21.06 percent for families with two children after their earned income reaches $16,690. The loss of a refundable credit is exactly the same, economically, as paying more taxes, and this is what imposes such high marginal rates on the working poor.

A typical middle-class family, on the other hand, is paying less in federal taxes than it has since 1967. Its marginal rate is also down substantially since it peaked in 1982 at 31.7 percent. The well-to-do family, too, has seen its average and marginal tax rates decline substantially.

Of course, these data do not prove that taxes are not too high. That is a subjective judgment related to issues of fairness and the value that people assign to the government benefits they receive in return. Many in the Tea Party talk as if the value of government is zero; consequently, they would probably complain about any tax level above zero.

Nevertheless, it is clear that federal taxes have not been rising and are, at least in historical terms, lower for most taxpayers than they have been since the 1960s. Those who assert that taxes are rising or are at confiscatory levels simply do not know what they are talking about.

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