For liberals wary of Obama-style “negotiation” — where the president offers steep concessions to his Republican opponents — there was a lot to like in Wednesday’s news conference. Far from bending on his core proposal — higher taxes on the wealthy — he doubled down on it, telling reporters that he had no intention of signing a deal that raised taxes on middle-income people or lowered tax burdens on the richest Americans. “What I’m not going to do,” said the president in response to a question about his willingness to “cave” to Republicans, “is to extend Bush tax cuts for the wealthiest 2 percent that we can’t afford and, according to economists, will have the least positive impact on our economy.”
If there’s anything worrisome about Obama’s approach, is that he hasn’t said much — if anything — about the payroll tax cuts. During the news conference, Obama explained the danger of letting middle-income tax cuts expire: The impending tax hike could lead families to cut back on holiday shopping, which in turn, would harm businesses, harm workers and imperil the slow-moving recovery.
All of this is just as true — if not more so — when it comes to the payroll tax cuts, which are slated to expire in January. They were first passed in 2010 as part of a deal with House Republicans to extend the Bush tax cuts for another two years. It’s a temporary measure that reduces workers’ share of Social Security taxes, in an attempt to provide ordinary people with a little extra income each month. It replaced the “Making Work Pay” tax credit, which was included in the 2009 stimulus bill and served a similar purpose — to provide higher wages to workers, at no cost to employers, and to boost spending on goods and services.
If enacting the payroll tax holiday produced a measurable boost to the economy in 2011, then allowing it to expire would be ruinous for the recovery. Writing for Slate, Matthew Yglesias notes the damage that would result from allowing the holiday to lapse:
Josh Bivens and Andrew Fieldhouse of the Economic Policy Institute estimate that the employment impact of rescinding the payroll tax holiday will be larger than the impact of letting all the Bush tax cuts expire. Jan Hatzius, chief economist at Goldman Sachs, says ending the holiday would shave 0.6 percentage points off 2013 GDP growth, effectively canceling out the benefits of QE3.
For all the attention on the fiscal cliff, it’s this that jeopardizes the recovery; remember, the cliff is more of a “slope” — the cuts and tax increases will roll out over the course of the year. By contrast, payroll taxes would go up — and workers’ paychecks would go down — almost immediately.
Obama holds the cards in the fight over the Bush tax cuts, and he should play them to extend middle-income cuts and preserve the payroll tax holiday. Both would be a huge boon to the recovery he was reelected to protect.