WASHINGTON - Hoping to jolt the slumping economy, Republican senatorial leaders signaled a willingness yesterday to go along with a cut in payroll taxes that could be paired with a reduction in the tax rate on capital gains.
The GOP leaders hoped the trade-off would be attractive to Democrats, who complain that capital gains cuts benefit the wealthy. Many Democrats favor a reduction in payroll taxes, which impose a disproportionately heavy burden on lower-income workers.
The possible bargain emerged as the Bush White House, and Republican and Democratic congressional leaders, struggled to shore up their political positions in the face of increasingly gloomy news of shrinking profits and rising layoffs.
President Bush remained confident that his income tax cut of last spring will combine with a series of interest rate cuts by the Federal Reserve Board to spark a turn-around soon, aides said.
But lawmakers in both parties still expect the economy to be the dominant issue in congressional elections next year.
"We need to look at some other additional spur," said Senate Republican leader Trent Lott, telling reporters yesterday that he was eager to explore a pairing of a two-year capital gains tax reduction - from 20 percent to 15 percent - with payroll tax reductions.
Such a tax cut package could stimulate economic growth by boosting capital spending through tax incentives to investors and by encouraging greater consumer spending as a result of leaving more money in the pockets of workers.
Critics say the long-term danger is that both tax cuts could reduce the amount of money available to pay Social Security and Medicare benefits for retiring baby boomers. But some lawmakers say they could structure the package to minimize that risk.
Yesterday Lott, who for weeks has been calling for a cut in the capital gains tax, leaped on suggestions aired over the weekend that the payroll tax that finances Social Security and Medicare could be cut as well.
"That is a very high tax on workers and employers," Lott said of the payroll tax. Cutting it, "would be something that would put money quickly into employees' pockets," he said. "I would like to at least see how that would work, discuss it with Democrats."
The payroll taxes that finance Social Security benefits have for years been running up large surpluses, and until recently were regularly used to finance other government operations. Now, the only federal surplus money left - about $160 billion this year - comes from Social Security payroll taxes.
But the Republican leader made clear he saw the payroll tax cut as only part of a package.
"I think it may be necessary for us to act on the capital gains rate cut, because it will clearly cause a growth in the economy," the Republican leader said. "And it brings in more revenue to the government, particularly in the first couple of years."
The payroll tax cut proposal was advanced over the weekend by Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat.
"We may need additional tax cuts to give a lift to this economy if we see continued weakness," he said in a television interview. "We'd want to do something to put money in people's pockets quickly."
He complained that Bush's income tax cut offered no relief to the more than 30 million workers who earn so little that they pay no income taxes, but give up a high percentage of their paychecks to payroll taxes.
"That left out a quarter of the people who would be most likely to spend that money to give a lift to the economy," Conrad said.
The Budget Committee chairman was not as enthusiastic about a reduction in the capital gains tax cut, which he said would take longer to have an impact on the economy.
"Capital gains would give you not much lift in the short term, and would dig the hole deeper for the long term," Conrad said.
But Senate Republican Whip Don Nickles is actively seeking a bargain that would couple the capital gains cut, which has long been a favorite of Republicans, as a trade-off for reducing the bite of payroll taxes, which Massachusetts Democrat John Kerry called "the most onerous tax in America."
"When we cut capital gains rates from 28 to 20 percent, it raised a lot more money than people anticipated," Nickles said on a Sunday talk show, referring to the reduction in 1997. "I think likewise, if we had a further reduction, it would also help the economy."
Cutting the capital gains tax typically brings in more revenue than it loses in the first year or two; investors are encouraged to sell long-held assets and take profits.
As for the payroll tax, Nickles said: "We could take that Social Security surplus and say, hey, let's give it back to the workers. Let's not make them pay it for a couple of years, for a few years. That would help the economy."
Rep. Benjamin L. Cardin, a Baltimore Democrat who serves on the tax-writing Ways and Means committee, said he would not support any tax cut that wasn't offset by spending reductions elsewhere in the budget.