Dec. 28 (Bloomberg) -- Progressives have a spring in their step this holiday season after the debacle suffered by House Republicans in the debate over the payroll tax.
Many liberals will be surprised to learn that a good deal of the credit belongs to one of their least-favorite members of the president’s economic team: Treasury Secretary Timothy Geithner, whose economic and strategic counsel set the trap that the House hardliners fell into.
President Barack Obama won the battle by pressing his pro-middle-class message, working wisely with Senate Republicans and Majority Leader Harry Reid to pass a bipartisan package extending the tax cut, and holding his ground when the House Republican rank-and-file refused to accept that solution.
But what made victory possible -- the scenario that the president and his team so skillfully managed -- was a strategic choice made by Obama and Vice President Joe Biden in December 2010, based on a recommendation from the Treasury secretary and his then-counselor (now director of the White House National Economic Council) Gene Sperling. It is the Geithner-Sperling advice that deserves special recognition today.
A year ago, the White House was facing a tricky situation. The Bush-era tax cuts were about to expire, including breaks for middle-class families (which the White House wanted to extend) and those for upper-bracket taxpayers (which the president wanted to end). Republicans were pressing hard to keep the high-end cuts in place; the president resisted.
Democrats lacked the votes to extend only the breaks for the middle class without also extending the relief to the upper incomes. Ending all the tax cuts risked causing economic upheaval at a delicate time in the recovery.
So the administration negotiated with congressional Republicans, agreeing to extend all the Bush-era breaks for two years, in exchange for the extension of a number of other expiring provisions that helped lower- and middle-income families.
As the deal took shape, the White House pressed for more than $2 in tax relief for the poorest for each $1 provided to those on the high end. Tax credits for college tuition and child care were included in the package to help hard-working families. But the largest win for the president was going to be a two-year extension of the Making Work Pay credit worth more than $100 billion. This targeted measure that Obama had campaigned on in 2008, and won passage of in the Recovery Act in early 2009, was good policy, progressive and efficient. It gave a tax cut of $400 to $800 for individuals with an income below $75,000 and couples earning as much as $150,000. Yet very few Americans knew they were getting it or understood how it benefited them.
It was at this point that Geithner and Sperling put forward an alternative: The president could sacrifice the extension of his own Making Work Pay provision and instead propose a measure that had previously enjoyed bipartisan support: a 2 percent cut in the payroll tax.
This plan offered some advantages:
First, while more than 80 million families had been benefiting from Making Work Pay for two years, the fact that almost no one knew about it limited its effectiveness as an economic boost and meant there was little public support for its extension. A 2 percent payroll tax cut, by contrast, would be understandable, visible and more likely to resonate with taxpayers. It would be strong medicine, economically and politically.
Second, while it would take two years to inject more than $100 billion into the economy via Making Work Pay, a 2 percent payroll tax cut would put that much money in people’s hands in just one year. That offered a quicker jolt to the economy, and a more substantial one over a given time period than Making Work Pay, thus achieving important economic policy goals for the administration.
Making Work Pay
But this advantage also posed a risk: A two-year extension of Making Work Pay, costing more than $100 billion, would have kept some relief flowing into families’ pocketbooks all the way through 2012, but the one-year payroll tax cut, costing the same amount, would be used up on Dec. 31, 2011. Ending relief to working families then would have been dangerous, both economically and politically, for the administration.
But what Geithner foresaw in December 2010 was exactly the dynamic that has played out over the past few weeks. He and Sperling suggested that when the payroll tax cut expired, reluctant congressional Republicans would be under pressure to extend it. Geithner argued that if the administration and its allies rallied effectively for an extension, the result would ultimately be that the one-year tax cut would become a two-year one.
If this could be achieved, the administration would put twice as much money into the hands of working families as the two-year extension of Making Work Pay, and the money would be injected into the economy twice as quickly, providing an added boost to economic growth.
The president and vice president took Geithner’s advice and put the payroll tax cut into the package enacted in December 2010. And, just as Geithner predicted, in December 2011, when that one-year measure was set to expire, House Republicans found it was untenable to refuse to extend it.
The result: more help for more working families (and our economy) -- and a political fiasco for House Republicans when they tried to get in the way.
Consequently, jubilant congressional Democrats and progressive activists owe a tip of the hat to Geithner, for whom they have little love. Perhaps the Treasury secretary’s central role in this victory -- and in outfoxing Tea Party Republicans - - will cause his critics to reconsider their view of him, or at least give him a fresh look.
(Ron Klain, a former chief of staff to Vice President Joe Biden and a senior adviser to President Barack Obama on the Recovery Act, is a Bloomberg View columnist. He is a senior executive with a private investment firm. The opinions expressed are his own.)
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