President Barack Obama’s advisers have discussed seeking a temporary cut in the payroll taxes businesses pay on wages as they debate ways to spur hiring amid signs that the recovery is slowing, according to people familiar with the matter.
The idea, which is in preliminary stages of discussion, is among several being talked about at the White House as the economy holds center stage for the administration and Congress, the people said on condition of anonymity to discuss internal deliberations. The unemployment rate in May rose to 9.1 percent, the highest level this year.
The talks reflect the political constraints the White House is operating under with the Republican majority in the U.S. House pushing to cut federal spending. A hiring stimulus based on a tax break for employers may appeal to Republican lawmakers, many of whom have called for measures to help businesses.
The idea of cutting the employer contribution to payroll taxes also has recently been under discussion among Republican members of Congress, said Douglas Holtz-Eakin, who was chief economic adviser to the 2008 Republican presidential nominee, Senator John McCain of Arizona.
“It’s semi-serious, not with a lot of urgency,” Holtz-Eakin said.
Echoing Tax Deal
A temporary break on employer payroll taxes would echo a centerpiece of the deal Obama and congressional Republicans reached in December 2010 to extend tax cuts enacted during the presidency of George W. Bush. That package included a two- percentage-point reduction in employee contributions to the payroll tax during 2011. The tax, which is divided into portions paid by employers and employees, finances Social Security and Medicare.
Obama said at the White House yesterday that he is interested in exploring with lawmakers from both parties extending some of the stimulus measures that were part of the tax-cut package “to make sure that we get this recovery up and running in a robust way.”
The people familiar with the discussions wouldn’t characterize how seriously the idea is being considered or whether it has moved beyond initial discussions. Other ideas that have been discussed in the past -- and rejected, according to some administration officials -- include a temporary holiday on corporate taxes on repatriated foreign earnings.
Payroll Growth Slows
Payrolls grew at the slowest pace in eight months in May, Labor Department figures released on June 3 showed. The 54,000 rise in jobs followed a 232,000 gain in April and was below the 165,000 median increase forecast by economists in a Bloomberg News survey.
The jobs numbers followed a series of economic statistics suggesting that the economy is decelerating. Manufacturing grew at its slowest pace in more than in a year in May, according to Institute for Supply Management data released last week. Consumer spending, which accounts for 70 percent of the economy, rose less than forecast in April as households felt the pinch of grocery and energy costs, a Commerce Department report showed.
Federal Reserve Chairman Ben S. Bernanke described the economic recovery as “uneven” and “frustratingly slow” in a speech in Atlanta yesterday. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established,” he said.
In an analysis released shortly after the December 2010 tax-cut deal, Deutsche Bank Securities economists Joseph LaVorgna, Carl Riccadonna and Brett Ryan estimated that the employee payroll tax cut would boost gross domestic product this year by an additional 0.7 percentage points.
Targeting the employer side of the payroll tax could both attract Republican support and spur job growth, said Christina Romer, who was Obama’s first chairman of the White House’s Council of Economic Advisers.
“A cut in the employer side of the payroll tax could absolutely help accelerate job creation,” Romer, an economist at the University of California at Berkeley, said in an interview. “In addition to the usual beneficial effect on demand, this tax cut would make hiring less expensive.”