Six weeks of stock market losses, poor jobs data, high prices in food and energy have the Obama administration casting about for policy methods by which they can get the economy going again.
As I predicted, on June 2nd in Obama's Nuclear Option on Economy, they’ve become so desperate that they are even considering tax cuts on evil corporations.
Since previous methods to gin up the economy are off the table, such as more stimulus spending and another round of monetary easing by the Federal Reserve Bank, the administration has nowhere else to go but cutting taxes.
After axing his top economic advisor last week, word from the White House is that Obama is considering a method of stimulus that would have been an anathema two years ago, but has been long favored by conservatives: cutting corporate payroll taxes.
The advantage in cutting employer-side corporate payroll taxes is that it stops penalizing employers for adding workers, while freeing up money that already resides in the payroll line item on a company’s P&L.
In fact conservatives made a strong case for a payroll tax holiday for both employers and employees in 2009 in lieu of stimulus spending controlled by the government.
"I'd have a payroll tax holiday for a year or two that would put taxes in the hands of everybody who has a job, whether they pay income taxes or not," Senate Minority Leader Mitch McConnell told Fox News in January of 2009 . "And, of course, businesses pay the payroll tax too, so it would be both a business tax cut and individual tax cut immediately."
But Obama’s political allies on the left quickly shot down the notion:
“A payroll tax holiday does not score well on this front — too little of the benefit goes to lower-income households struggling to make ends meet,” wrote the left-wing Center on Budget and Policy Priorities, playing the rich versus poor game, “and too much goes to higher-income taxpayers, who are likely to save a significant fraction of any new resources they receive.”
Instead, Congress voted for an $800 billion targeted stimulus plan that went into the kind of government programs that put our economy in the hotseat to begin with.
$122 billion went to things like first-time home buyer credits, student financial aid, Earned Income Tax Credit, and transportation subsidies. The Inspector General recently released a report that detailed widespread fraud in many of these programs, as I also detailed in Dems: Greed is Good as a Tax Credit on May 31st.
All told the stimulus payments equaled about $800 billion.
A payroll tax holiday would have come in at $60 billion per month to total $720 billion for the calendar year 2009 according to the Center on Budget and Policy Priorities. The left however was afraid that a payroll tax holiday would have permanently crippled payroll taxes. Once discarded, it may have been difficult for taxpayers to see funds come out of their paychecks again and for corporations to get used to the idea of being penalized for creating jobs.
I would advocate that once we get rid of payroll taxes temporarily, we should make the effort at tax reform and make the cuts permanent. After all, if we expect companies to add jobs through a tax cut, a temporary cut would only ensure that corporations pay higher payroll taxes once the cuts are rescinded.
With the stock market posting its longest losing streak since 2002 and the job market growing anemically, the Obama administration must be firstly concerned about the prospects of re-election, rather than ideology.
The S&P 500 is threatening to retest the March lows after rallying since September. Some economists think that the run up in the stock market was largely an inflationary phenomenon, in the same manner of price increases in commodities like oil and gold. Others think that the economy has just entered a “soft patch,” and economic growth will resume in the second half of the year, spurring a rally in stock prices.
The GOP should take the opportunity to press Obama to dismantle the economic agenda that he crafted in the first two years.
Frankly, I don’t think even a large comprehensive tax cut, like suspending the payroll tax, will be enough to save an Obama presidency.
Instead, I think a cut will provide a “read my lips” moment, as in “Read my lips: No new tax cuts,” that will alienate Obama supporters and show the rest of America how flawed his administration’s policies have been.
But a tax cut would help his successor create a new American economic boom and go a long way toward fixing some of the structural problems with the U.S. economy.
It will put tax policy front and center of public policy debate.
And when taxes are discussed, conservatives generally win.
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