Obama urges Democrats public to back his tax cut deal with GOP
By Jim Puzzanghera Los Angeles Times
They didnt get everything they wanted but they got an extension of the Bush-era tax cuts & their workers got a payroll tax break that could boost consumer spending. Their workers got something nobody expected a tax break that the
White House said would put about $1000 more in the hands of the average family.
The agreement between
President Obama and congressional
Republicans is designed to prevent a hit to the economy from the scheduled Jan. 1 expiration of tax cuts for nearly all Americans including about 750000 business owners who file individual returns.
Businesses didnt get everything they wanted in the proposed extension of the Bush-era tax cuts but they got what they most desired: no hike in rates next year.
The deal also is aimed at giving the struggling recovery a jolt through a series of measures including extending the funding of benefits for long-term unemployed workers and giving additional tax breaks to individuals and businesses.
What I can say with confidence is that this package will help strengthen … the recovery Obama said Tuesday.
Business groups were generally pleased with the agreement because it would preserve the existing tax rates for two more years.
The agreement also included an idea that industry groups and some economists have advocated since the financial crisis hit: a temporary reduction in the payroll tax that employers and employees pay to fund Social Security.
But there was a twist to that proposal. The $120-billion tax break would go only to employees a surprising move that the nonpartisan Congressional
Budget Office has said is slightly less effective for economic growth and job creation than giving the break to employers.
In the past weve endorsed a full payroll tax holiday for the employer and employee said Bill Rys tax counsel for the National Federation of Independent Business. We certainly think relief on both sides of that equation would have been better.
But Rys and other advocates of a payroll tax break said cutting the amount paid by employees still would have benefits.
The proposed 2-percentage-point reduction next year would mean $1400 more next year for a person earning $70000. The additional take-home pay should boost consumer spending increasing demand for products and services and prompting businesses to hire.
This whole package greatly exceeded my expectations said John Makin a senior fellow at the conservative-leaning American Enterprise Institute in Washington who had pushed for a broader payroll tax break. I dont want to let the best be the enemy of the good.
Details were still emerging Tuesday on the deal to extend all the tax cuts even for top earners for two years. The nearly $900-billion price tag for the agreement would be funded through borrowing which would increase the federal budget deficit.
The White House and congressional Democratic leaders had wanted to allow the tax cuts to expire for top-level earners those with taxable income above $250000. But Republicans and business groups opposed the move contending that it would hurt small businesses that file individual returns.
Only an estimated 3 of small business owners earn more than $250000 a year according to Congress Joint Committee on Taxation. But they account for half of about $1 trillion in net business income reported on all individual returns.
Business groups including the U.S. Chamber of Commerce the Business Roundtable and the National Assn. of Manufacturers said they supported the deal largely because it would keep the rates from going up for two years.
Enacting this bipartisan framework … is one of the best steps Washington can take to eliminate the uncertainty that is preventing our employers from hiring investing and growing their businesses said Bruce Josten the
chambers chief lobbyist.
The chamber which has been an outspoken critic of Obamas economic policies would have preferred a permanent extension of all the tax cuts as Republicans had advocated.
But Josten said the temporary extension of the current tax rates along with such other business tax breaks as a two-year extension of a tax credit for research and development costs will go a long way toward helping our economy break out of this slump.
In addition to the extension of the R&D tax credit which expired nearly a year ago the tax-cut deal would enact a proposal that Obama made in September to allow businesses to write off the total amount of many capital purchases made in 2011 instead of depreciating the cost over several years.
The goal of the write-off is to entice businesses to step up large capital purchases such as machinery which in turn would stimulate the sluggish economy.
The
Treasury Department estimated in October that the plan would accelerate $150 billion in tax breaks to about 2 million businesses for those purchases generating more than $50 billion in additional investment.
The National Assn. of Manufacturers said the provision would create a positive ripple effect in the economy by encouraging investment and creating demand for machinery and equipment.
The so-called bonus depreciation began on a smaller scale in 2008. The Congressional Budget Office estimated this year that extending and expanding it through next year would raise the nations economic output over five years
20 cents to $1 for each dollar spent.
Reducing payroll taxes has a greater effect on economic growth even more so when the employers part of the tax is cut the Congressional Budget Office said.
An employer and employee each pay 6.2 of the employees annual salary in payroll tax on the first $106800 in salary. Under the deal between Obama and Republican leaders employees would have that tax reduced to 4.2 next year. Employers would continue to pay 6.2.
Reducing employee payroll taxes would boost economic output 30 cents to 90 cents for every dollar spent the CBO said. Reducing the payroll taxes paid by businesses would increase economic output 40 cents to $1.20 for each dollar spent.
Proposals to reduce payroll taxes have focused on doing it for both employees and employers or just for employers under the theory that giving businesses more money would spur them to hire.
For employers the payroll tax is a tax on hiring and employing labor said Makin of the American Enterprise Institute. At the margins it makes you more inclined to lay people off if you have problems and it makes you less inclined to add people to the payroll.
Makin said he would have preferred giving businesses a similar payroll tax break and would have made up for the increased costs by eliminating part of the deal that would extend unemployment insurance for about 7 million workers whose benefits will expire over the next year.
Rys of the National Federation of Independent Business said his national small-business group also would have preferred a payroll tax break for employers. But the employee break should help he said.
If that can spur some new spending in small businesses that would be a good thing he said.
