As is typical for Washington trial balloons, the White House is denying a report that they would push for a tax cut similar to Making Work Pay to replace the payroll tax cut and continue the stimulative wage subsidy effect amid an economy that’s still growing too slowly.
Allowing the payroll tax cut to expire, an element of the fiscal slope, would take roughly $120 billion out of the economy for 2013, at a time when deficits are actually keeping the US economy afloat, and stronger than its counterparts in Europe. On Friday, the Washington Post reported that the White House, mindful of this, considered proposing an alternative tax relief that did not implicate the Social Security Trust Fund, as the payroll tax cut does. But White House spokesman Josh Earnest tamped down that speculation.
Over the weekend, White House officials sought to damp any talk of new tax cut proposals coming from Mr Obama. Josh Earnest, the deputy press secretary, said the administration was “not contemplating” a new tax cut “at this time”.
However, pressure has been building from Mr Obama’s Democratic allies in Congress to put some fresh stimulus on the table. After the election, a frenzied round of negotiations will begin to try to strike a deal to avert the “fiscal cliff”. If Barack Obama is re-elected, it is widely assumed that he would try to reach a broad deficit reduction agreement in negotiation with Republican leaders.
But some Democrats are already getting nervous that he would give away too much in those talks, not only on taxes but also on cuts to popular government health and pension schemes. A White House decision to consider an alternative to the payroll tax cut for short-term economic stimulus could help calm some of their worries.
It’s possible that the tax relief would become the sweetener for some drastic grand bargain, and such a short-term boost for long-term structural changes would not be a good trade. On its own, averting the fiscal contraction in 2013 would simply be the right macroeconomic policy.
Earnest focused on extending the Bush-era tax cuts on the first $250,000 of income, while letting the lower rates above that threshold expire. But under such a regime, families making less than $250,000 would still see higher taxes in 2013, of around 2% of income, not including the expirations to the stimulus-era increases to the Earned Income Tax Credit and Child Tax Credit.
The makeup of Congress and the Presidency will go a long way to determining the options available on these fiscal issues in the lame duck session and beyond. But it would be positive to actually have someone put forward the best policy for the economy in the short term. This would include direct spending on job creation and infrastructure projects, of course, but a wage subsidy in a time of stagnant wages wouldn’t hurt.