What Fiscal Cliff? Obama Planning Another "Tax Cut" Fiscal Stimulus

Tyler Durden's picture

Since it would appear that QEternity has ostensibly failed in its main goal of pushing the stock market higher (and mortgage rates lower), the White House seems to be scrambling. Obama administration officials have concluded that the economy, while improved (apparently), is still fragile enough to warrant another bout of stimulus. The same old kitchen sink is being thrown at the problem as they are now resorting to the same fiscal stimulus that has also failed time and time again (as we noted here). As WaPo strawmans reports the White House is discussing the idea of a tax cut that it believes will lift American's take-home pay and boost a still-struggling economy (citing people familiar with the administration's thinking).

 

Once again we expect 'economists' to come up with counter-factual forecasts.

 

We can't help but get the terrible feeling of deja vu here (paging Christine Romer). Electioneering? for sure; Will we hear "We have a plan"; of course; but in reality for this to make any sense (in the debt-deleveraging balance sheet recession that we find ourselves in), we must wipe from our minds for one moment the looming fiscal cliff (that our politicians seem stuck with irreconcilable differences), the debt-ceiling/deficit/AAA downgrade debate, and the utter failure of linear-Keynesian model forecasts for stimulus effects in the past.

 

Via Washington Post:

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 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.

 

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The administration’s work on the proposal comes as each presidential candidate is under intense pressure to demonstrate he has the better tax plan.

 

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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... 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.

 

...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 the AARP have criticized using the payroll tax cut for 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 recession through $831 billion in increased spending, aid to states and tax cuts.

 

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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.

 

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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.

 

Read that again - and we dare you not to laugh! This is Keynesian-based Einsteinian madness at its very best...

 

One report that apparently has scared the administration into action is the following from the National Association Of Manufacturers - Fiscal Shock.

 

Fiscal Shock Conclusion:

The inaction and stalemate in Washington will continue to weigh heavily on consumer and business confidence as the year winds down. Even if the Administration and Congress resolve the uncertainty before the end of the year, economic growth already has sustained significant damage. The short-term fiscal contraction set for 2013 will trigger long-run durable losses to GDP, productivity and real income.

 

Even under the best-case scenario, it will take almost a decade for economic activity and employment to reach the levels they would have reached without a fiscal shock. While the spending cuts and tax increases reduce the federal deficit and debt, the substantial negative consequences of not addressing the end-of-year fiscal crisis before it happens will be devastating.

 

 

Fiscal Shock