Friday, September 3, 2010

So What CAN Obama Do?

Actually, Obama and the Democrats have a number of options for stimulating economic growth.  The question is really what the fiscal and more importantly the political cost of it will be.  Tyler Durden brings us Goldman analyst Alec Phillip's take.

Among the options that seem most likely to be considered:

A hiring credit: Congress enacted a credit in March 2010 that exempts employers from the 6.2% paying Social Security payroll tax on newly hired employees through the end of the year, and provides an additional $1,000 for employees retained for 52 weeks or longer. The cost of this credit is reasonably modest (the Treasury expects hires thus far will reduce payroll taxes by about $6 billion) and it could be expanded. The most effective expansion would likely be to simply lengthen the period that payroll taxes are waived, so that employers have somewhat longer term certainty regarding their labor costs. Previous congressional proposals included an income tax credit (rather than a payroll tax exemption) of several thousand dollars for a new hire, which has the advantage of simplicity but would tend to focus the incentive effects mainly in the lowest-paying parts of the labor force.

Payroll tax cut: Like the hiring credit, a payroll tax credit already exists under current law. The 2009 Recovery Act lowered tax liabilities for individuals with incomes under $100,000 by roughly $400 per person, for a total of $60bn in annual tax savings. The administration proposed extending the Making Work Pay (MWP) credit, as it is known, it in its FY2011 budget, but there has been relatively little discussion of extending it, perhaps because many taxpayers never realized they received it in the first place. If the administration makes a proposal in this area, the most obvious would be to expand or modify the existing MWP credit, potentially by simply raising the threshold at which the Social Security payroll tax starts to be applied.

Small business tax cut: Policymakers continue to focus on the challenges facing small businesses, so efforts in this area seem likely. First, the small business bill that is currently pending on the Senate floor should pass by mid-September. As a reminder, this would provide modest tax relief for small firms (roughly $7 billion over ten years) and would provide up to $30 billion in capital to banks to backstop small business lending. The most obvious option would be to increase the threshold for small business expensing, from $250,000 currently to a much higher figure—potentially in the millions—and make firms with greater amounts of investment eligible (the incentive currently phases out for firms with investment greater than $800,000). A less likely option would be some type of broader tax relief for small business. This would neutralize any concern that the expiration of tax rates on higher incomes will hit small businesses, but would have a lower bang for the buck if it does not incentivize hiring or investment.

Bonus depreciation: The administration has already proposed 50% bonus depreciation for 2010, following its expiration at the end of 2009, and this may be enacted as part of the pending small business legislation. To the extent that the administration wants to do something new in this area, it is possible that they could simply raise the percentage that may be expensed in the first year.

Infrastructure: The president has clearly identified this as a priority in recent comments, and already has proposals on the table to address infrastructure investment: extension of the Build America Bond (BAB) program, but at a slightly reduced subsidy rate, and a national infrastructure bank that would subsidize private investment in large-scale infrastructure projects that meet certain criteria, including through issuance of government guaranteed debt. Renewable energy incentives may also appear on a potential list of policy options, though we aren’t aware of any specific proposals in this area beyond further expansion of tax incentives. 
That's the good news.  The bad news:  Republicans aren't going to allow any of this to pass the Senate without making the Bush tax cuts semi-permanent.  The only discussion in my mind is how long the upper-income cuts will be extended for.  The Republicans will insist the cuts be made permanent, the Dems will give them at least 3 years if not 5 or even 10, and of course the plan won't pass before the election, not without the Republicans getting the 5 or 10 year extension as a minimum. 

The GOP knows they can stall for time, watch the economy crumble and pick up dozens of seats in the House and even ten or so in the Senate, and then start in with the "No Lame Duck Session!" chant and make a huge stink about even being in Congress in November and December and just block everything in protest, forcing the Dems to "pass the largest tax hike in history" (as the tax cuts expire on January 1 unless something is done about them) to which then the GOP controlled Congress will want to pass a permanent tax cut bill as soon as Congress reconvenes and look like heroes as they force Obama to try to veto it.

And the Dems are going to walk right into this idiocy.


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