comments_image Comments

Corporate America Is Hoarding Tons of Cash: Why In the World Would Obama Think About Giving Them More Tax Cuts?

The White House is desperate to get any measure that might boost the economy past a dysfunctional Congress.

One would think that an almost daily barrage of grim economic news about working America might inspire a sense of urgency among policymakers, prompting them to think boldly about how to get the country moving again.

Meanwhile, the companies in the Standard & Poor's 500-stock index are sitting on a record $960 billion in cash -- the Wall Street Journal notes that "there is a cash crisis in corporate America—although it comes not from a shortage of the stuff, but from a surplus." Given that the federal government has been collecting the lowest share of the economy in tax revenues since 1950 during the past few years, one might also expect that giving American businesses more "tax relief" wouldn't be a terribly high priority. 

But this is America, and the White House is reportedly courting big Wall Street donors to help finance Obama's re-election campaign, so it's considering the merits of offering a temporary cut in the payroll tax paid by businesses. It's an idea that might stimulate the economy a little bit and could well gain bipartisan support, but it's also fraught with risk and represents yet another sign that the administration has thrown in the towel in the larger debate over how to recover from a blistering recession.

The payroll tax finances Social Security and Medicare. It's divided evenly between employers and workers – each pay 6.2 percent. Last December, Obama cut a deal with the Republicans to give workers a break in 2011 – we're paying 4.2 percent this year – which put a few more dollars in people's pockets.

Businesses want a piece of the action as well. According to the Wall Street Journal , “For years, small-business advocacy groups have called for a payroll tax holiday for employers... The National Federation of Independent Business, a lobbying group in Washington, D.C., has been a vocal proponent” of the cut. So, there's a good chance of getting some GOP support for the measure.

No details have been released, and Bloomberg reports that the idea is “one of several” the White House is kicking around. Presumably, it would be a short-term measure like the employee-side tax break passed last year. “A cut in the employer side of the payroll tax could absolutely help accelerate job creation,” Christine Romer, the former chair of Obama's Council of Economic Advisers, told Bloomberg. “In addition to the usual beneficial effect on demand, this tax cut would make hiring less expensive.”

And that's where the rationale goes off-track. The biggest problem facing the economy remains consumers' lack of appetite for spending money – lack of money to spend is a better way of putting it – and the employee-side break addressed that problem to a small degree. But businesses are sitting on tons of cash right now – corporate profits are at an all-time high. They're not hiring in this country because they don't see a lot of customers breaking down their doors to buy their goods and services. Instead, they're giving investors fatter dividends, buying up smaller firms and investing in their overseas operations – American multinationals are creating plenty of jobs abroad.

And while Romer is right that such a cut would make hiring people cheaper, that too appears to be a solution in search of a problem; incomes have been stagnant for a decade, and during 2009 and 2010 we saw the biggest two-year drop in labor costs (the combination of wages and benefits) since 1962-'63.

The White House's calculus is not difficult to gauge. Cutting the employer's payroll tax would have some small stimulative effect, it would just be a poor bang for the buck. The administration is looking at waging the 2012 campaign amid high unemployment, and they're willing to take whatever economic boost they can get past the GOP-led House and a potential Republican filibuster in the Senate. They've also decided that appearing “serious” about reducing the deficit is key to winning over independent voters.

See more stories tagged with: