Bloomberg News

Tax Cuts Exceeding Republican Plans Said Considered by Obama

September 06, 2011

Sept. 6 (Bloomberg) -- President Barack Obama may press Congress for tax cuts that would exceed his past proposals as well as some of the offerings from House Republicans to strengthen his hand in talks on measures to boost the U.S. economy, according to a person familiar with the discussions.

With Obama set to lay out his plans in a Sept. 8 address to Congress, the administration is focusing on cuts targeted at middle-income Americans to spur consumer spending, which accounts for 70 percent of the economy, said the person, who spoke on condition of anonymity to discuss internal deliberations.

In a speech to a union crowd in Detroit yesterday, Obama said he would challenge Republicans on taxes.

“You say you’re the party of tax cuts?” Obama said before the annual Metro Detroit Central Labor Council rally. “Well then, prove you’ll fight just as hard for tax cuts for middle- class families as you do for oil companies and the most affluent Americans.”

Obama will unveil his new economic agenda as unemployment remains at 9.1 percent more than two years after the recession’s official end. The jobless rate and the sluggish recovery from the worst recession since the Great Depression will be central issues as Obama runs for re-election next year. Republicans, who control the U.S. House, have signaled resistance to new spending that would add to the federal budget deficit.

Stalled on Jobs

Without new measures to boost hiring, Obama’s budget office forecast last week that the unemployment rate would be little changed in 2012, averaging 9 percent.

“With the unemployment rate stuck at such a high level, the economy desperately needs help,” said Peter Orszag, former director of Obama’s Office of Management Budget.

Whatever plan Obama settles on “will probably have to lean heavily on tax cuts if it’s going to have a serious chance of being enacted,” Orszag, vice chairman of global banking at Citigroup Inc., said in an e-mail. “They should be coupled with credible deficit reduction that is enacted now but doesn’t take effect for some time.”

Obama also said in Detroit yesterday that spending on infrastructure will be a major component of his plans to create jobs.

“We’ve got roads and bridges across this country that need rebuilding,” Obama, 50, said. “We’ve got more than 1 million unemployed construction workers ready to get dirty right now. There is work to be done and there are workers ready to do it. Labor’s on board, business is on board. We just need Congress to get on board.”

Republican Resistance

The discussions about making bigger moves on taxes amount to recognition by Obama’s political advisers that billions of dollars in new infrastructure spending stands little chance of winning approval from the Republican-controlled House, the person said.

The person didn’t give details of what specific tax measures Obama is considering. The president has repeatedly called for an extension of the 2 percent employee payroll tax holiday that Congress passed last year and will expire in December.

His aides have said he is considering a reduction in the employer portion of the payroll tax and proposals to reward businesses for hiring unemployed workers.

‘Wait and See’

House Republicans haven’t embraced the idea of a payroll tax holiday extension, with some lawmakers questioning its impact on long-term economic growth. Brendan Buck, a spokesman for Speaker John Boehner, an Ohio Republican, said “we’ll wait and see what the president is offering, but we hope it represents a break from the costly, ineffective policies of the last few years.”

House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, and Ways and Means Committee Chairman Dave Camp, a Michigan Republican, have called for lowering the top individual income tax rate to 25 percent from 35 percent. Neither lawmaker has specified how they would achieve such a reduction. A major reworking of the tax code is unlikely before the end of the year.

Concern over the economy has increased as growth weakened during the first half of the year to its slowest pace of the recovery. U.S. stock futures fell, indicating that the Standard & Poor’s 500 Index may slide for a third day when trading reopens today.

Treasuries rose, pushing 10-year yields to a record low as demand increased for the relative safety of government debt. Benchmark 10-year rates dropped eight basis points to 1.91 percent as of 9:17 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2.125 percent note maturing in August 2021 rose 22/32, or $6.88 per $1,000 face amount, to 101 30/32.

Labor Pressure

Labor groups, a key Democratic Party constituency, are pressing Obama to seek major spending on infrastructure to create jobs. Unions were disappointed in Obama’s agreement with Republicans last December that extended Bush-era tax cuts for all Americans, including the wealthiest, and in the continuing efforts to cut federal spending by $2.4 trillion.

The leaders of the AFL-CIO, Service Employees International Union and the United Auto Workers had the president’s ear on the flight aboard Air Force One to and from the Detroit rally.

AFL-CIO president Richard Trumka said after returning to Andrews Air Force Base that Obama declined to preview what he would call for in his Sept. 8 speech.

Trumka said he expected to be pleased with the speech after hearing the president’s remarks in Detroit, including his call to create more jobs through federal spending on road and bridge building.

Administrative Steps

SEIU President Mary Kay Henry said in addition to asking Congress to pass legislation to encourage job creation, there are steps the administration can take on its own. She said there are unspent funds in individual agencies that could be used and that people can be hired for work on disaster-stricken areas using federal relief funds.

U.S. Chamber of Commerce President Tom Donohue called on Obama to increase domestic energy production, boost trade with countries including South Korea and step up the spending on transportation infrastructure.

Donohue, in a letter yesterday to Obama that he previewed last week, said the “most immediate priority” for the U.S. is creating jobs for 25 million people who are “unemployed, underemployed or have simply given up looking for work.”

Donohue also called for reductions in tax rates for overseas earnings and on corporate capital gains.

Since World War II, no U.S. president has won re-election with a jobless rate above 6 percent, with the exception of Ronald Reagan, who faced 7.2 percent unemployment on Election Day in 1984. The jobless rate under Reagan had come down more than 3 percentage points during the prior two years.

--With assistance from Keith Naughton, David Welch and Tim Higgins in Southfield, Michigan, and Mike Dorning, Holly Rosenkrantz and Angela Greiling Keane in Washington. Editors: Joe Sobczyk, Don Frederick

To contact the reporters on this story: Hans Nichols in Washington at hnichols2@bloomberg.net; Margaret Talev in Detroit at mtalev@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.


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