Will Republican Senators Fall Into Harry Reid's Trap?

A leading independent financial analyst warned on Tuesday that allowing the president’s payroll tax cut for workers to expire on December 31 might reduce GDP growth by as much as 1.5 percent in the first quarter of next year. And that fits in perfectly with Republican strategy.

Senate Minority Leader Mitch McConnell — who famously intoned last year that making Obama a one-term president was his “single most important political goal along with every active Republican in the country” — seems to be keeping true to his word.

“One of the things that we’re watching is the payroll tax extension and the signals that we’re getting from Washington as to whether we get that extension,” said Michael Pond, an analyst with Barclays (find the video at the bottom of the page). “Because if we don’t, our growth forecast frankly will probably be dropped down from about 2.5 percent in Q1 down to around 1 percent. It’s that big.”

This is just the latest in a series of dire warnings from private economists about allowing the tax cuts to expire. They argue that help for workers is far more effective stimulus than Bush-style tax breaks for the rich or a favorite of the conservative movement: cutting corporate taxes.

Republicans have tried to make the case that they oppose the measure solely because of how Democrats in the Senate propose to pay for it — by instituting a surtax of 3.25 percent on income beyond $1 million per year.

But while he and his colleagues certainly would like to protect the rich from more progressive taxation, Republican Sen. Jon Kyl of Arizona made clear this weekend that the GOP just doesn’t believe the economic forecasters who say raising taxes on the working class is the worst possible thing you can do in a recession.

“The payroll tax holiday has not stimulated job creation,” Kyl said on Fox News Sunday. “We do not think that is a great way to do it.”

Of course, even if one agrees with Kyl that the tax cut has not boosted economic growth, it does not logically follow, as he suggests, that raising taxes on 100 million Americans struggling to contend with the most prolonged economic malaise since the Great Depression makes sense.

Perhaps recognizing the trap he and his colleagues were falling into, McConnell on Tuesday hinted at a Republican proposal (to be released in the coming days) that would pay for the extension of the payroll tax cuts by finding offsetting spending cuts elsewhere.

Nonetheless, if Majority Leader Harry Reid of Nevada and his fellow Democrats hold firm — and if the Supercommittee negotiations are any indication, they could well — in opposing spending cuts and successfully make this a public confrontation where Republicans would hike taxes on workers to bail out the rich, the political benefits could be significant, especially with reports showing the renewed tax break could create as many as 50,000 jobs per month.

“We found in August that 65% of Americans support keeping the payroll tax right where it is,” said Tom Jensen, director of Public Policy Polling, among the most accurate firms in the country despite a Democratic Party affiliation. “What was interesting about that was the agreement along party lines — 72% of Republicans, 67% of independents, and 57% of Democrats did not want to see it increase. This is something where the Republican leadership could potentially alienate not just swing voters but also their own party base if they insist on letting the cuts expire.”

Democrats are confident they have a winning political argument, and will make it a key component of their campaign theme for next fall: income inequality.

“I can’t believe that at a time when working families in this country are struggling paycheck to paycheck, when we need them to have the resources to buy things in our economy, to create wealth and profitability and more jobs, the Republican position is, they’ll raise the payroll tax on working families,” said Dick Durbin of Illinois, the no. 2 Senate Democrat. “I think that just defies logic.”

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