By BINYAMIN APPELBAUM The New York Times
WASHINGTON — The likely centerpiece of President Obama’s job creation plan, a proposal to further reduce Social Security taxes, is emblematic of a broader package of modest, pragmatic measures that economists say will at best make a small dent in the nation’s economic problems.
In a Thursday night speech before a joint session of Congress, the president is expected to propose the extension of a tax cut enacted last year reducing the contributions that workers must make toward future Social Security benefits.
Obama also is expected to propose a new cut in the matching payments that employers must make.
The tax cuts, which would deprive the government of more than $100 billion in annual revenue, are the largest items in a plan also expected to include proposals for other cuts in business taxes, an increase in federal spending on roads, schools and other public infrastructure, and fresh aid for states to limit ongoing layoffs of government workers.
Cutting taxes is a time-honored strategy for stimulating growth.
The formula is simple: Workers with larger paychecks will spend more money, and companies will respond to that increased demand by hiring more workers, creating a virtuous cycle that increases the pace of growth.
But in this case, the White House mostly is proposing to extend an existing tax cut, maintaining rather than expanding the spending power of American workers.
The plan, in other words, is primarily defensive. The forecasting firm Macroeconomic Advisers estimates a tax cut extension might create about 33,000 jobs each month next year — insufficient to reduce unemployment.
The company, based in St. Louis, said in a research note in late August that the other elements it expected in the White House plan might add another 17,000 jobs a month, for a total of 50,000 jobs, although other experts believe such estimates are highly uncertain and ultimately unverifiable.
“Because none of these ideas address the main impediment to hiring — persistently insufficient final demand — our expectations for the success of the jobs bill are, well, not so great,” Macroeconomic Advisers said.
The plan, however, is a political exercise, defined by the art of the possible.
Republicans generally oppose government spending to stimulate the economy, but House leaders have expressed a willingness to discuss spending on infrastructure, and to consider extending the payroll tax cuts.
“We believe in infrastructure spending,” the House majority leader, Eric Cantor, Republican of Virginia, said Wednesday.
Cantor added that he had supported payroll tax cuts in the past, suggesting he might do so again.
The Social Security tax is paid in equal shares by workers and their employers. Both pay 6.2 percent on the portion of worker’s income up to $106,800. The tax cut passed last year reduces the tax rate for workers to 4.2 percent of income, a savings of $1,000 for a worker making $50,000.
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, delaying major purchases. 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 more than 30 years.
“It’s hard to have a robust recovery when Americans are so dispirited,” John Williams, president of the San Francisco Fed, said in a speech on Wednesday describing that data.
Analysts also speculate that some consumers may not know they are getting the money.
The payroll tax cut arrived quietly and in small increments — a few extra dollars on the bottom line of a weekly check — in contrast with the high-profile stimulus payments that the government mailed out in 2008.
There is sharp disagreement among economists about the value of giving companies a tax break, too.
The Congressional Budget Office estimated last year that a tax cut for employers would have a greater economic impact than a tax cut for workers.
The nonpartisan office, which analyzes fiscal policies for Congress, reported that every dollar in reduced taxes on employers would generate up to $1.20 in economic activity, while every dollar in reduced taxes on workers would generate only up to 90 cents of activity because workers will tend to save a portion of their additional income.
A number of independent economists disagree with this conclusion, arguing that tax cuts for workers are more effective, because companies are even less likely to spend the money.
Large corporations in particular are already sitting on record piles of cash, generally reporting that they are unwilling to invest in new workers or equipment because of a lack of demand.
Mark Thoma, an economist at the University of Oregon, said that any tax cuts for companies should be tied to hiring, to ensure that the loss in government revenue produced a public benefit.
“If they don’t spend the money on employees, you don’t get a demand-side effect,” he said.
Studies of similar tax cuts in other countries suggest the truth lies in between. A 2008 study by the Government Institute for Economic Research in Finland, for example, found companies shared about half the money from a payroll tax cut with workers in the form of higher wages.
The study also found that there was “no significant effects on employment.”
Cutting payroll taxes does not affect the government’s legal obligation to pay benefits to senior citizens.
But it does diminish the revenues available to meet those obligations, increasing the likelihood that the government will have to borrow to pay those benefits in the future.
Some advocates who warned last year that temporary tax cuts have a way of becoming permanent see the possibility of an extension as confirming those fears. They worry that a long-term reduction in Social Security revenues could undermine political support for the program by making it seem less like an insurance program paid for by its beneficiaries and more like a form of welfare.
The Social Security tax “creates a stake of every American working person in the system,” said Nancy Altman, co-director of Social Security Works, a coalition that defends the program in its current form. “If you start meddling with that you start to pull apart the political contract.”
