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Administration’s September Rollout: Big Payroll Tax Cut

At yesterday’s press briefing, Robert Gibbs ruled out a new big stimulus package. By last night, the Washington Post reported on a fall jobs package being hashed out by the White House. These two are not in conflict, because the Administration doesn’t want to use the word “stimulus.” And in fact, what they’re proposing, according to Lori Montgomery and Anne Kornblut, is a series of big tax cuts.

Among the options under consideration are a temporary payroll-tax holiday and a permanent extension of the now-expired research-and-development tax credit, which rewards companies that conduct research into new technologies within the United States […] Policy staffers are debating a range of options. For example, a payroll-tax holiday – a top priority of many business groups – could be applied only to new hires or extended to current employees. It could be limited to small businesses or extended to larger firms.

Permanently extending the research credit would cost roughly $100 billion over the next decade, tax analysts said. And depending on its form and duration, a payroll-tax holiday could cost more than $300 billion. While costing significantly less than last year’s stimulus package, both ideas would be far more dramatic than anything the White House has so far acknowledged considering.

More spending on infrastructure, particularly transportation projects, is also under discussion. But it would be easier for a package composed purely of tax cuts to “avoid the stain of a ‘bailout’ or ‘stimulus’ label,” said one official familiar with the talks, speaking on the condition of anonymity because the deliberations were private.

So, this is something. At least Democrats can point to something, a big September plan, and either force their counterparts into a tough vote, or pass something they think can help the economy.

And yet, this appears designed to mainly attract Republican votes or moderate voters. They want to do an all-tax cut stimulus package while studiously avoiding the word “stimulus.” (Permanent extension of the R&D credit, by the way, was always a policy the White House preferred, so nothing different there.)

You can look at this as a policy or a political document. If you want to do something that can pass, Republicans are probably dug in on an all or mostly-tax cut solution, and would blcok anything else. But they’re not yet even responding favorably to this. If you start from the premise that this won’t pass due to GOP obstructionism, and you get to play Fantasy Legislator, would this be the immediate go-to policy? Maybe from some Third Way perspective. As Paul Krugman says today, if Obama came out for motherhood, Republicans “would declare motherhood un-American.” So why not propose a solution commensurate to the problem, with the most bang for the buck? Why not a $600 billion “Rebuild America” program?

Indeed, it’s not clear from the article whether these policies would even help on their own. A properly devised payroll tax holiday, economists believe, would have a stimulative impact on employment. “In the long-run a payroll tax cut will end in workers wages,” said Dean Baker of the Center for Economic and Policy Research. “This is an article of faith that all economists must swear to before we get our license.”

However, the article suggests that the payroll tax cut would be both temporary and limited to the employer side of the tax, which damages its effectiveness significantly. “This is zero stimulus, it’s just handing money to employers, a bit lower on my priority list than beating my head against the wall until it bleeds,” Baker says. He frets that a business-side tax cut will just put more money on the sidelines, in addition to the $1.6 trillion that businesses have already set aside, without any incentive to hire.

If you accept the premise that Republicans will block anything, there are plenty other options out there, Baker says. “In terms of boosting the economy, they should have some money spent on jobs programs for hard hit areas (e.g. Detroit), a lot of money for aid to the states, a lot of money for rebuilding the infrastructure (focus on rails), money for weatherization, and work share. Tax cuts for moderate income people are fine. Give a 7 percent work credit up to $30k and then freeze it for higher income people.”

These ideas fall in line with what AFL-CIO President Richard Trumka has been suggesting for nearly a year.

In addition to the political/policy divide, there are long-term consequences to dressing up tax cuts as the white knight on a horse to save the day from mass unemployment. The stimulus package, in reality, worked but was too limited to solve the entire problem, as Krugman says today:

The actual lessons of 2009-2010, then, are that scare stories about stimulus are wrong, and that stimulus works when it is applied. But it wasn’t applied on a sufficient scale. And we need another round.

I know that getting that round is unlikely: Republicans and conservative Democrats won’t stand for it. And if, as expected, the G.O.P. wins big in November, this will be widely regarded as a vindication of the anti-stimulus position. Mr. Obama, we’ll be told, moved too far to the left, and his Keynesian economic doctrine was proved wrong.

But politics determines who has the power, not who has the truth. The economic theory behind the Obama stimulus has passed the test of recent events with flying colors; unfortunately, Mr. Obama, for whatever reason — yes, I’m aware that there were political constraints — initially offered a plan that was much too cautious given the scale of the economy’s problems.

If tax cuts get pulled out now, it accepts the GOP premise that tax cuts are the only instrument to aid an economy. It undercuts liberal ideas that have been proven over the past two years. And don’t think it will satiate Republicans, who will now pounce, noting that “the President agrees with us on tax relief” and that “he should extend all the Bush tax cuts if he really wants to help small businesses succeed.” I mean you can just hear this now.

As a policy document, this may reflect reality but may not be properly designed to do much of anything. As a political document, it’s a lead balloon, and a potentially crippling one at that.

UPDATE: Any messing with the payroll tax should come out of general revenue, it goes without saying. This shouldn’t be done as an excuse to weaken the finances of Social Security and Medicare further and serve the needs of the entitlement-cutters.

UPDATE II: The President said in a Rose Garden availability that he would address “a broader package of ideas next week.” He has a news conference on Friday, which could be used for that purpose.

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David Dayen

David Dayen

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