The White House is weighing the idea of a tax cut that it believes would lift Americans’ take-home pay and boost a still-struggling economy, according to people familiar with the administration’s thinking, as the presidential candidates continue battling over whose tax policies would do more for the country.
Obama administration officials have concluded that the economy, while improved, is still fragile enough that it may need another bout of stimulus. The tax cut could replace the payroll tax cut championed by President Barack Obama in 2011 and 2012, which was designed as a buffer against economic shocks such as the financial crisis in Europe and high oil prices. It expires at year’s end.
The new tax cut could provide hundreds of dollars or more a year to workers and show up in every paycheck. It may be similar to a tax cut Americans received in 2009 and 2010, which provided up to $400 for individuals and $800 for married couples, sources close to the administration said.
The administration’s work on the proposal comes as each presidential candidate is under intense pressure to demonstrate he has the better tax plan. During the campaign, Obama has insisted that he wants to keep taxes from rising for the middle class while increasing them on the wealthy as a way of shoring up the country’s finances. His challenger, Mitt Romney, has sharply criticized Obama’s approach, saying any new taxes would crimp economic growth, while also calling the White House’s earlier stimulus efforts a failure.
The Romney campaign and top Republican lawmakers declined Friday to comment specifically about the tax cut being considered by the White House.
Any new tax cut would require congressional approval after the election. Administration officials have said in the past that the payroll tax cut should be allowed to expire at the end of the year, and the White House has not said publicly whether it is considering an alternative.
A growing number of voices have been calling on the White House and Congress to extend the payroll tax cut, which has meant about $1,000 in extra take-home pay annually for the average family. These supporters include Harvard professor Lawrence H. Summers, formerly Obama’s top economic adviser, and Rep. Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee.
“If we’re going to look at anything, we should be looking at a payroll tax cut or other measures that have a similar effect,” Van Hollen said in an interview.
The White House declined to confirm whether it is exploring a new policy, with an official saying late Friday only that “there’s no specific new proposal such as this one at this time.”
The payroll tax cut, which reduced people’s payroll tax rate from 6.2 percent to 4.2 percent, is considered particularly effective by economists because it shows up in every paycheck. Economists say it may have boosted economic growth each year by about 1 percent, helping create hundreds of thousands of jobs.
The administration may be looking at alternatives to the payroll tax cut because some lawmakers, particularly Democrats, don’t like the idea of using a tax that ordinarily goes to fund Social Security. Any lost revenue as a result of the payroll tax cut has been offset by additional taxpayer money. Still, powerful interest groups such as AARP have criticized using the payroll tax cut as a short-term stimulus.
The administration is looking to replicate the effect of the payroll tax cut without relying on Social Security revenue, sources said. The people familiar with the deliberations declined to be named because the discussions are ongoing.
One option is to have employers reduce how much in federal taxes is withheld from employees’ paychecks, up to a certain amount per year. This was precisely the type of tax cut provided in the 2009 stimulus bill, which sought to jolt the economy out of a recession through $831 billion in increased spending, aid to states and tax cuts.
The tax cut in the bill, known as “Making Work Pay,” provided up to $400 in higher income for an individual and up to $800 for a couple filing a joint return. Unemployed or self-employed people could receive a lump sum.
The tax credit was limited to individuals with an adjusted gross income of $95,000 or less and couples with an adjusted gross income of $190,000 or less. Economists say that low- and moderate-income people have the greatest propensity to spend any additional income.
Romney has said he wants to renew the Bush income tax cuts for all taxpayers and develop a plan to reduce tax rates by another 20 percent. He would make up for the lost tax revenue by eliminating tax loopholes and deductions.
If Obama proposes the new tax cut, it will come amid a firestorm of negotiations over a range of spending and tax decisions that will dominate the public debate after the election.
Without any new legislation, the nation would go over the “fiscal cliff” at the end of the year, leading to an automatic series of sharp spending cuts and tax increases. Many economists say that would tip the nation into a recession.
“The very first thing Congress should do is … pass the bill the president proposed to ensure taxes don’t go up on 98 percent of Americans at the beginning of next year,” a White House official said Friday.
Obama is calling on lawmakers to immediately renew the Bush tax cuts for families earning less than $250,000 per year, while allowing the tax cuts for those making more to expire. Republicans refuse to decouple the tax cuts.