Plan’s Focus on Social Security Taxes Reflects Its Modest Ambitions...
>>>Plan’s Focus on Social Security Taxes Reflects Its Modest Ambitions
By BINYAMIN APPELBAUM
Published: September 8, 2011 The New York Times
WASHINGTON — The centerpiece of President Obama’s job-creation plan, a proposal to further reduce Social Security taxes, is emblematic of a package of modest measures that some economists describe as helpful but not sufficient to lift the economy from its malaise.
In his speech on Thursday night, Mr. Obama asked Congress to cut the amount that workers must contribute toward Social Security benefits, extending an existing measure, and to reduce, for the first time, the matching payments that employers are required to make.
The cuts, which would deprive the government of about $240 billion in revenues next year, are the largest items in the president’s $447 billion job-creation plan, which includes payments to unemployed workers, incentives for companies that hire workers and increased federal spending on infrastructure. All of the measures will require the support of Congressional Republicans.
Cutting taxes is a time-honored strategy for stimulating growth. The formula is simple: Workers will spend more money when their paychecks grow, and companies will respond to that increased demand by hiring more workers, creating a cycle that increases the pace of growth.
Preliminary analyses of the White House plan estimate that the tax cuts could create more than 50,000 jobs a month, a significant boost considering that employment climbed by 35,000 jobs, on average, in each of the last three months. But even if Congress immediately agreed to pass the president’s entire plan, the economy is likely to continue to struggle. Companies must increase payrolls by about 100,000 people every month to keep pace with population growth.
Still, Joel Prakken, senior managing director at Macroeconomic Advisers, a forecasting firm, said that the benefits of creating more than half a million jobs next year should not be minimized. “It’s going to make the unemployment rate lower than it otherwise would be,” he said.
The other elements of Mr. Obama’s plan, however, highlight the challenges of doing more. Economists regard benefits for unemployed workers as among the most effective means of increasing growth because people without jobs tend to spend the money quickly. But Republicans generally oppose increased spending on social programs.
Infrastructure spending, by contrast, enjoys bipartisan support, but breaking ground on new projects can take a long time, delaying the impact on the economy.
The administration’s focus on payroll tax cuts, which became more ambitious in the days leading up to the speech, is an exercise in the art of the possible. While economists regard other kinds of measures as potentially more effective, the cuts would put money directly in the hands of consumers, and Republican leaders have indicated they are willing to consider the proposal.
Seeking to exploit that potential opening, the White House decided to considerably expand the scope of the cuts in the latter stages of planning.
The Social Security tax is paid in equal shares by workers and their employers. Both pay 6.2 percent of a worker’s annual income up to $106,800. The president’s plan would reduce the amount that workers pay by half, a savings of $1,500 for an employee who makes $50,000.
The current tax cut, set to expire in December, has reduced the tax to a rate of 4.2 percent. The new proposal would further reduce it to 3.1 percent in 2012.
In the present climate, however, there are significant reasons to doubt that consumers are honoring the predictions of economic models by taking that money and racing out to spend it.
Families are devoting a larger share of income to paying debts, which is important for the economy’s long-term health but does nothing to stimulate growth. Concern about future earnings also is weighing on many households, reducing their willingness to spend. A recent study found that 62 percent of households expect their income to stay the same or decline over the next year, according to the Federal Reserve Bank of San Francisco, the lowest level of confidence in 30 years.
“One striking aspect of the recovery is the unusual weakness in household spending,” the Federal Reserve chairman, Ben S. Bernanke, said Thursday in Minneapolis.
There is also broad disagreement among economists about the president’s companion proposal to give companies a tax break, too. ................
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