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Geithner’s long game set up Obama’s payroll-tax triumph

 

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 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 childcare 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.

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