Payroll tax cuts key to recovery: White House

WASHINGTON Tue Nov 29, 2011 9:13pm GMT

WASHINGTON (Reuters) - Allowing payroll tax cuts to expire would hurt the U.S. economy and further dent hiring, and may make the United States more vulnerable to outside shocks, President Barack Obama's top economist said on Tuesday.

"Extending the payroll tax cut will strengthen the recovery. Without it, it will be a drag on economic growth," Alan Krueger told reporters at the White House.

Obama has proposed extending lower taxes for workers and small businesses as part of his drive to fight unemployment - which remains at 9 percent - before the November 2012 vote in which he is seeking re-election.

Republicans in Congress have indicated they thought there would eventually be a deal to extend the payroll tax cuts for a year. But they prefer a broad overhaul of the U.S. tax system instead to give taxpayers and business owners more clarity about what they owe.

Krueger said it was important for lawmakers to extend the payroll tax cuts that Obama, a Democrat, has pushed for to avoid unnecessary pain.

"This is a critical time for the economy, and I think it's a time where the economy can use more medicine to strengthen and sustain the recovery," he said, suggesting lower taxes on workers and companies would "provide insurance against shocks that might be coming."

"If one looks at the potential problems for economic growth coming from Europe, it even strengthens the argument for strengthening our own demand here at home," Krueger said.

(Reporting by Laura MacInnis and Andy Sullivan, Editing by Doina Chiacu)