Proposed payroll tax cut draws economists' skepticism

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WASHINGTON - Economists are generally skeptical about the biggest and most bipartisan part of President Obama's $477 billion plan to help put 14 million people back to work: a large payroll tax cut for workers and businesses.

While they were more positive about Obama's plan to spend as much as $140 billion on roads, schools and other infrastructure, many economists do not expect the plan to jump-start an economy teetering on the edge of a double-dip recession.

Robert Reich, labor secretary in the Clinton administration and now an economist at the University of California, Berkeley, wrote on his blog that the plan correctly identifies the problem as growth and jobs, not deficits, but "isn't nearly large enough or bold enough to make a major dent in unemployment or to restart the economy."

Michael Boskin, a top economist in the George H.W. Bush administration now at the conservative Hoover Institution at Stanford University, said that while the plan as a whole "might generate a small amount of job creation, the costs would be several hundred thousand dollars per job."

Although he favored a payroll tax cut in late 2008 when companies were laying off millions of workers, Boskin said it would be less effective to draw the jobless back to work.

"It would be much better to have permanent, predictable policy," Boskin said. "There's so much uncertainty, so much fear of more taxes and more regulations in the future, that fixing that would be much better than temporary Band-Aids."

The "American Jobs Act" is more than half the size of Obama's 2009 stimulus. Hoping the plan will shore up support among moderates, Obama set out to sell it in the battleground states of Virginia, Florida, Ohio and North Carolina.

The Obama plan would cut in half the worker portion of the payroll tax, expanding a temporary reduction set to expire. The plan would also halve the employer portion of the tax for the first $5 million in payroll.

Among other incentives, companies that hire a long-term unemployed worker would get a $4,000 tax credit. The tax cuts and hiring incentives make up an estimated 57 percent of the plan.

The plan will not be enacted as written with the House under GOP control, but Republican leaders offered an unusually conciliatory response after an August spent listening to fearful constituents. GOP leaders quickly began negotiating for relaxation of regulations and enactment of stalled trade deals with Colombia, Panama and South Korea, part of their growth prescription along with lower taxes and deficits.

Obama's plan also pleased disenchanted Democratic liberals, sending House Minority Leader Nancy Pelosi reaching for sports analogies: "Touchdown, an ace serve, in the spirit of the season, a home run," she said.

Pelosi cited estimates by economist Mark Zandi that the plan could create 1.9 million jobs next year, and increase growth in gross domestic product to as much as 4.5 percent next year. Economic growth slowed to a crawl of just 1.0 percent in the second quarter.

Donald Marron, director of the nonpartisan Tax Policy Center who served in the George W. Bush administration, said he has grown humble about models such as Zandi's predicting a big jolt from the Obama plan.

"But given how weak the economy is," he said, "it seems like the right thing to do."

(Contact Carolyn Lochhead at clochhead(at)sfchronicle.com.)

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)

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