November 28, 2011 8:31 pm

Democrats defiant on payroll tax cuts

By James Politi in Washington

Democratic leaders in the Senate opened negotiations in Congress over the extension of payroll tax cuts for American workers by proposing that they should be paid for with a 3.25 per cent surtax on millionaires.

The legislation – which is at the core of President Barack Obama’s effort to spur the US economic recovery ahead of next year’s election – was presented on Monday, in a challenge to Republicans in Congress who have so far resisted imposing higher taxes on the wealthy.

Even Democrats concede that Republicans are unlikely to change their minds, but they want to try to score some political points by forcing their opponents to choose between a tax rise on all US employees and a tax increase only on the rich.

The extension of payroll tax cuts introduced this year is the largest portion of Mr Obama’s jobs plan – which was presented in September and has so far been stymied by Congress. If the current reduction in payroll taxes for employees from 6.2 per cent to 4.2 per cent is extended, it would stimulate the economy by $110bn. If, as Mr Obama wants, that tax burden is lowered further to 3.1 per cent, and combined with payroll tax breaks for businesses as well, it would leave some $250bn in the pockets of US consumers and employers next year.

Although some Republicans have voiced opposition to the payroll tax cuts because of their temporary nature, dubbing them “sugar high economics”, many expect that ultimately they will cave and approve the extension of some of the measures to avoid the fallout and blame for allowing them to expire.

Republicans and Democrats struggle to agree on a deal to cut government spending as the US deficit soars to $15,000bn

For this reason, the behind-the-scenes negotiation now in Congress is how to cover the cost of the stimulus, a necessity given America’s budgetary woes. If the millionaire’s tax is turned down, as expected, lawmakers will have to comb other parts of the budget and the tax code for new savings to attach to the payroll tax extension. Indeed, Democrats and the Obama administration have signalled that they are willing to discuss alternative ways to pay for the bill. “We are not going to let this lapse,” said Harry Reid, the Senate majority leader, on Monday.

But finding any consensus on deficit reduction measures has shown itself to be incredibly difficult in the wake of the collapse this month of a special panel of Congress tasked with lowering the country’s debt burden by at least $1,200bn over the next decade.

Copyrigh：The Financial Times Limited 2011.