September 9, 2011 - Dow, Greece, and Analysis of President’s Speech
With the Dow down 2.14% (to 11,054) at 11:35a EST, investors are focused on the EU and the risk to EU banks and Greece bondholders with the significant concern about a Greek default; Greece’s two-year note yields added as much as 124 basis points to 56.29 percent, a euro-era record. Credit-default swaps insuring Greek sovereign bonds jumped 412 basis points to a record 3,438, according to CMA. The five-year contracts signal there’s a 95 percent probability the country won’t meet its debt commitments; meanwhile many EU.bond yields are up.
Also, in the after-analysis of the President’s September 8 speech, there is also concern that Congress and the Administration will be unable to agree on a final plane, in a timely manner.
A. Summary of White House Fact Sheet and Congressional Reaction
- In his speech to a joint session of Congress on September 8, President Obama proposed cuts to both employee and employer payroll taxes for 2012, and tax credits meant to encourage hiring of unemployed workers.
- The president's proposal, the American Jobs Act, would cut employee Social Security payroll taxes in half in 2012. It would also reduce business payroll taxes by the same percentage on companies' first $5 million in wages and would completely eliminate payroll taxes for companies that increase their payroll by up to $50 million relative to the prior year. The payroll tax provisions would cost $240 billion, according to a White House fact sheet.
- Additional tax provisions in the plan include a year-long extension, through 2012, of 100 percent expensing for business investments; a "returning heroes" tax credit of up to $5,600 and a "wounded warriors" credit of up to $9,600 for companies hiring unemployed or injured veterans; and a $4,000 tax credit for employers hiring people who have been unemployed for longer than six months.
- Overall, including new spending provisions, the bill would cost $447 billion, the White House fact sheet said. The document did not specify the time frame for that figure.
- The cost of the plan would be entirely offset there are no details as to how. Funding and offsets would be outlined in a follow-up proposal September 19, the President will submit to the Joint Select Committee on Deficit Reduction for consideration (see our related comments of September 8). The scheduled expiration of the 2001 and 2003 tax cuts for upper-income earners should play a role in the offsetting deficit reduction.
- The President cited there will be proposals to reform the corporate tax code, however there are no details as of yet.
- As a revenue raiser, a suggested reform provision discussed today by commentators was a “Corporate Profits Repatriation Tax Holiday” to encourage U.S. corporations to bring offshore profits to the U.S., at a reduced tax rate; such a plan was successfully undertaken in 2004.
- Lawmakers largely fell along party lines in their reactions to the speech, with Democrats praising the plan and challenging Republicans to support it, while Republicans dismissed much of it as old ideas. The parties have spent recent weeks debating the value of a payroll tax cut such as the one Obama proposed. Senate Finance Committee Chair Max Baucus, D-Mont., wants more details, while House Ways and Means Committee Chair Dave Camp, R-Mich., said in a statement that while he agreed with the President on some points, he is disappointed at the lack of substantive comments on corporate tax reform. Eric Cantor is open to the payroll tax cuts provisions, J. Boehner believes the total plan deserves consideration; meanwhile, House Democrats are tired of the President continuing to blame Congress
B. Economic Impact: Comments by the EPI
- The EPI Research and Policy Group believes over 4 million jobs could possibly be over the next few years created by the President’s plan. Potentially 1.2 million persons could be employed in construction projects repairing deteriorating U.S. schools.
- Separately, the Blue Chip consensus estimates U.S. unemployment at 9.3% at the end of 2012. A lack of current skills and education is one reason wjy employment has not (and will not) increased; federally- sponsored training programs could assist.