Obama Presents Tax Cuts Package

by Mike Godfrey, Tax-News.com, Washington

12 September 2011

In an address to a joint session of the United States Congress, President Barack Obama has proposed a USD447bn package of tax cuts and federal spending, with the aim of creating additional jobs in a growing economy.

The purpose of what has been called the American Jobs Act, and which he is immediately sending to Congress, is “to put more people back to work and more money in the pockets of those who are working”. He hopes that it “will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and if they hire, there will be customers for their products and services”.

Apart from increased funds for America’s infrastructure and schools, at the centre of Obama’s proposals is a reduction in federal revenues by USD240bn by way of cuts in employee payroll taxes in 2012.

His plan would not only extend for next year the payroll tax cut, from 6.2% to 4.2%, which will otherwise expire in December, but also lower the tax to 3.1% for the first USD5m of a firm’s payroll. The President’s objective is to extend the payroll tax cut for all firms, with relief focused on the 98% of businesses with less than USD5m in payroll.

He would also introduce a payroll tax holiday for firms that increase their payroll by adding new workers or increasing the wages of their current worker, with a cap at the first USD50m in payroll increases. Obama pointed out that the Congressional Budget Office has called reducing payroll tax the most effective of all tax cuts in supporting employment.

There would also be a tax credit of up to USD4,000 for hiring workers who have been looking for a job for over six months, while a “Returning Heroes” tax credit for veterans, providing a credit of up to USD5,600 to encourage the hiring of unemployed veterans, and a “Wounded Warriors” tax credit of up to USD9,600 for hiring unemployed workers with service-connected disabilities, would also be available.

In addition, he proposes extending 100% expensing into 2012, allowing all businesses to take an immediate deduction on investments in new plants and equipment.

To ensure that the American Jobs Act is fully paid for, the President has said that he will call on the Joint Select Committee, that is currently formulating a plan to reduce the aggregate deficit over the next decade by a further USD1.5 trillion, to come up with the additional deficit reduction necessary to pay for the Act and still meet its deficit target. However, he has also said that he will shortly release a detailed plan that will show how he thinks that additional deficit reduction can be achieved.

In their replies to the President’s address, Republican politicians have largely been wary in not criticizing his policies outright and putting themselves on the wrong side of the debate in stimulating growth and job creation. They had already indicated that any plans to increase infrastructural spending would probably be supported.

The Republican Speaker of the House of Representatives, John Boehner, said that while the GOP have laid out a blueprint for economic growth and job creation with the "Plan for America’s Job Creators," which focuses on removing government barriers to private-sector job growth, he appeared conciliatory in saying that “the proposals the President outlined merit consideration." But he added that: "We hope he gives serious consideration to our ideas as well.”

Dave Camp, the Republican Chairman of the House Ways and Means Committee, said that he was “disappointed that the President did not discuss the one area that can truly spark sustained private-sector job creation in this country – comprehensive tax reform”. However, he looked forward “to reviewing the details of the President’s proposals and working with the Administration and my colleagues in the House and Senate on pro-growth policies that get America’s employers hiring again and workers back on the job”.

Nevertheless, Orrin Hatch, the Republican Ranking Member on the Senate Finance Committee, could not help from commenting that the President’s plan is "nothing new". He said that: "It simply doubles down on the same failed policies that he has pursued before”. He also said that he was looking for “meaningful tax reform, serious deficit reduction, and regulatory roll-back, all of which would have a positive impact on economic growth and job creation.”

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