Payroll tax Cut

Broken No More?

There is a new breeze blowing through Washington this week. Yes it has hit 70 degrees outside. Spring is in the air, and it has lightened everyone's step a bit. But the real change is what is happening in the governing party and in the Capitol. The people's business is starting to get done.

It has been a remarkable few weeks here in DC. A payroll tax cut for small businesses to help provide a modest boost to the economy was signed into law, passing the Senate with 11 Republican votes. A serious bipartisan immigration reform plan outline was advanced. The final financial regulatory reform package is taking shape. The President offered up a thoughtful vision on how to improve the nation's education system, and is about to pass a major overall and expansion of the college student loan program. The FCC released a powerful vision for the future of broadband and the internet in the US.  Competitive - and what we all hope were fair - elections were conducted in Iraq. And of course, the big one - modernizing and improving our health care system - is close to passage. 

After a fitful first year, the Democrats are learning, however clumsily, to become the governing party. None of the three Democratic leaders - Obama, Reid, Pelosi - have ever been in their position when the Democratic Party was in such a strong position with the public, or had so much power in Washington. Democrats have more seats in Congress and received a higher vote share in 2008 than in any time since the 1960s. Barack Obama was not yet age ten the last time Democrats were in a similar position in DC, and frankly, the years of conservative ascendancy, which kept the Democrats on the defensive and largely out of power, left an entire generation of politicians more used to challenging the power of others than wielding it themselves. And it has shown over the past 14 months.

This new day for Democrats - huge Congressional majorities, a country tempered by failed conservative policies, a significant Party ID advantage, and a powerful and growing majority coalition - is unlike any time we've seen in Washington in at least 40, if not 70 years. The Democrats have clearly needed time to learn how to be a governing party, to align their interests, manage complex legislation, bring along a lot of new staff, Senators, Members of the House, and a young President into a coherent team. It has been a bumpy process - no big surprise - but there are signs this week that this new 21st century Democratic Party is finding its way, learning how to manage the new circumstances, do what is required to move the nation forward.  It is learning how, after the end of the conservative ascendancy, to become a governing party.

In 2007, Peter Leyden and I wrote an article called The 50 Year Strategy, which argued that the failure of conservative politics and the emergence of a "new politics" of the 21st century offered the chance for the progressive movement to build a new and durable progressive era, and usher in a re-alignment in American politics.  I still believe, deeply, that this opportunity is very much present today. With strong leadership and the courage to tackle the nation's most important problems, it is still very much within the center-left's grasp. And in many ways this question - could the Democrats seize the historic opportunity they had to realign politics, and usher in a new era of reform and progress? - has been, and remains the single most important question in American politics today.  This morning, the chances of the Democrats seizing the moment - and the conservatives continuing to make equally historic political miscalculations - seems ever more possible.

Steven Pearlstein has a nice reflection on all this in the Washington Post this morning.

It may not be morning in America just yet, but today it certainly feels a lot more like spring - a time of hope and of possibility - for Washington and for the 21st century center-left.

Update: See our recent report on the changing coalitions of the two political parties to learn more about the current state of the Democratic Party's emerging majority coalition.

House Passes Payroll Tax Cut to Promote Job Creation

Yesterday, the House of Representatives passed a version of Jobs Bill recently passed by the Senate. The legislation contained a payroll tax cut similar to one advocated by NDN. Specifically, the bill included:

  • A payroll tax holiday for businesses that hire unemployed workers, to create some 300,000 jobs and an income tax credit of $1,000 for businesses that retain these employees 
  • Tax cuts to spur new investment by small businesses to help them expand and hire more workers 
  • Extension of the Highway Trust Fund allowing for tens of  billions of dollars in infrastructure investment 
  • Provisions -- modeled after the Build America Bonds program – to make it easier for states to borrow for infrastructure projects, such as school construction and energy projects 

For more on the payroll tax cut, please see:

Senate Jobs Bill Achieves Cloture with Five Republican Votes

A Senate measure designed to spur job creation moved forward last night, as five Republicans joined with their Democratic colleagues to push measure over the 60 vote procedural barrier. At the core of this proposal is a measure similar to one proposed by NDN, Senators Schumer and Hatch, and the White House that puts 13 billion dollars into temporarily reducing the payroll tax for new hires. 

The Senate’s newest member, Scott Brown, led the way for Republicans to join the measure, and was followed by Susan Collins, Olympia Snowe, George Voinovich, and Christopher Bond. What’s curious is that Orrin Hatch, who coauthored an op-ed proposing the measure with Schumer, and that many other Republicans did not vote for the measure. After all, it’s a tax cut for small businesses.

The Senate should be congratulated for moving this measure forward, as should those who voted for it from both parties.  I remain confused by exactly what kind of tax cut needs to be proposed to get more Republicans than three from New England and two who are retiring to vote for it.

For more on this measure, please see:

President Obama's Weekly Address Outlines Plan for Job Creation

President Obama's weekly address today focuses on his plans to create jobs and aid small businesses:

For more background on the tax credit the President cites, please see:

Cutting Payroll Taxes to Create Jobs

Looking for ways to jumpstart job creation, the White House and Senate heavyweight Chuck Schumer have both come around to the same idea, cutting the payroll taxes that employers pay on new hires.  The economic sense of this idea is straight-forward:  If you want to induce businesses to hire people whom, under current economic conditions, they wouldn’t otherwise take on, you have to reduce their costs of doing so.   A payroll tax cut is the most direct and targeted way to reduce those costs, which is why the Congressional Budget Office found recently that it’s about the most powerful policy option available to both create new jobs and boost GDP growth.

The President and Senator Schumer have the right idea, and it should be the centerpiece of the jobs bill now making its way through Congress.   In fact, they should think about this in a larger context.  Payroll tax reform can be more than just one of the pieces of a package of job-friendly tax breaks for “small businesses,” and more than a temporary measure to deal with double-digit unemployment.  America’s job-creating power has weakened over the past decade, creating serious reasons to approach payroll tax cuts as not merely a measure to deal with our current high jobless rate, but a key part of a new economic policy.  

For decades, the cost of payroll taxes had little apparent effect on job creation in the United States, the economic area in which we have long led other large, advanced economies.  In the 1970s, when almost nothing else went right with the U.S. economy, we created more than 21 million new net jobs.  In the expansion of the 1980s, while productivity and income gains slowed, we still created more than 20 million more new jobs.  And the expansion of the 1990s added 19.5 million more.  This record of steady, strong job creation came to an abrupt end in the six-year expansion of 2002-2007, when we managed to create less than 11 million new jobs.  So, even before the economy gave back most of those job gains in the 2008-2009 recession, American businesses in this decade were creating new jobs at just about half the rate they did in the 1980s and 1990s.  

America’s vaunted job-creating machine has collided with globalization.  The problem is not simply or even mainly that American businesses have been sending jobs abroad – in fact, the foreign-based workforce of U.S. multinationals has barely grown at all since 2002.  The real issue is that globalization intensifies competition, which makes it harder for businesses to pass along any new costs in higher prices.  The good news is that these forces keep inflation low.   The bad news is that when a business’s costs do go up – most notably, for health care and energy -- and competition stops them from passing along these cost increases in higher prices, they have to cut other costs.  The costs they’ve been cutting are jobs and wages.

Since the chances of Congress passing health care or energy reforms that would contain these near-term costs are slim, it’s time for a new approach that directly reduces the costs to companies of creating new jobs.

So, Congress should cut the employers’ side of the payroll tax for new hires, covering the new employee’s first two years on the jobs.  Over that period, most workers will pick up considerable new, job-specific skills, so employers will want to keep them on when the special tax break no longer applies to them.   To prevent businesses from gaming the system, the policy also should apply only to new hires that increase both the company’s total workforce and its total payroll – safeguards already included in both the Schumer proposal and the President’s plan.  Finally, under the revived pay-as-you-go rules, Congress will have to replace the foregone revenues for Social Security, perhaps even as part of a larger tax reform effort.  

Payroll tax reform could be the leading edge of a renewed commitment by the administration to bolster jobs and wages.   At a minimum, it’s an approach to job creation that just about everyone will understand and most Americans may well appreciate, come November.  On that basis alone, a payroll tax cut should be the core of whatever Congress chooses to call its new jobs bill.

For background on Dr. Shapiro's advocacy for the payroll tax cut, please see: President Obama, Senators Advance Payroll Tax Cut to Spur Job Creation. 

President Obama, Senators Advance Payroll Tax Cut to Spur Job Creation

This week, President Obama and Senators Schumer and Hatch proposed important job creation ideas similar to those advocated by NDN and Dr. Robert Shapiro over the past several months. At the core of these proposals sit payroll tax cuts or tax credits that reduce the employer’s cost of hiring, which NDN has advocated as the most effective way to spur employment in the near-term. 

Dr. Robert Shapiro, Chair of NDN's Globalization Initiative and former Under Secretary of Commerce for Economic Affairs, said this about the White House and Schumer-Hatch proposals:

Reducing the cost to hire at a time when the economy is encountering special problems creating jobs simply makes good economic sense, and reducing the employer's payroll taxes on new hires, when the employer is also expanding its overall workforce, is the most effective way to do it.  The proposals advanced by the White House and Senators Schumer and Hatch do just that. NDN has long promoted versions of this approach, and while there are no silver bullets for unemployment, understanding the dynamics responsible for weak job creation now and throughout the 2002-2007 recovery is a necessary first step to restoring real prosperity. Taking targeted action now by reducing the payroll tax for new hires a vital next step.

NDN congratulates the Obama Administration and Senators Schumer and Hatch for offering this important proposal and will work for the rapid passage of this measure. For Shapiro's advocacy of such an approach, which dates back to October, please see:

  • January 20, 2010, The Path to More Jobs and Growth – "It’s virtually the only proposal that’s actually targeted directly at job creation, and it’s effective because it directly reduces a company’s cost to create new jobs. Its’ projected power to boost GDP follows directly from its success in creating jobs, since the new workers would spend virtually everything they earn, boosting output in the goods and services they choose and the jobs required to provide those goods and services." 
  • December 4, 2009, Video of the White House Forum on Jobs and Economic Growth: Encouraging Business Investment, Competitiveness and Job Creation working group in which Dr. Shapiro discusses this proposal. 
  • December 2, 2009, How to Create Jobs in a Troubled Economy"Exempt from payroll taxes the first $3,000 to $5,000 of wages paid in each of the first two years to new hires by firms that expand their work forces."
  • November 2, 2009, The Storms on the Economy’s Horizon"An even better idea would be to jumpstart new job creation by exempting the first few thousand dollars of wages from payroll taxes."

For more of NDN's work on the economy, please see our backgrounder on "A New Economic Strategy for America."

Syndicate content