By Thomas Ferraro and Donna Smith
WASHINGTON (Reuters) - President Barack Obama prodded congressional Republicans on Monday to extend a payroll tax cut, and his fellow Democrats proposed to fund it with spending cuts and a "tiny surtax" on the rich.
Republicans will likely reject the Democratic move, which appears aimed at cranking up pressure on them to compromise and find a way to renew the popular tax break in advance of next year's congressional and presidential elections.
Speaking at the White House, Obama said the tax cut needs to be acted upon before they expire at the end of this month for the sake of millions of Americans and the weak U.S. economy.
"The majority of economists believe it's important to extend the payroll tax cut and ... would lower their growth estimates for our economy if it doesn't happen," Obama said.
Republicans argue that the tax cut, which went into effect last year, failed to stimulate the economy and undermined the Social Security retirement program that it funds.
Senate Republican Whip Jon Kyl said, "There's some very important reasons not to do this again. It doesn't produce a good result and can produce some bad results."
But Kyl noted that he backed the tax break last year because the legislation also extended income tax cuts enacted during the administration of President George W. Bush.
"If we do that again, obviously it would be something I would be supportive of," Kyl said.
Democrats have opposed an extension of the Bush-era tax cuts, contending they swell the record U.S. debt and provide unneeded aid to the very rich.
Without congressional action, the payroll tax that workers pay to help fund the Social Security retirement program would revert to 6.2 percent, up from the current 4.2 percent tax.
Democrats want to temporarily reduce it to 3.1 percent, but have abandoned efforts to extend the tax break to employers.
TINY SURTAX ON THE WEALTHY
As Obama spoke at the White House, Senate Majority Leader Harry Reid took the floor of his chamber and announced a modified proposal to cover the cost of an extension with a "mixture of spending cuts" and a "tiny, tiny surtax" on the wealthiest Americans.
The proposed Democratic extension and expansion of the payroll tax cut would cost about $185 billion, and save the average American family about $1,500 next year, aides said.
The wealthy would also benefit from an extension of the tax cut because it's levied on the first $106,800 of an employee's salary.
Democrats propose covering the cost of the tax break extension with about $40 billion in "cost savings" agreed to by Democrats and Republicans on the now-defunct super committee on deficit reduction. Most of the rest would be paid for by a surtax of less than 2 percent on income above $1 million.
Some savings would come from tightening, at the request of Republicans, eligibility requirement to prevent millionaires from drawing unemployment benefits.
"This is a serious proposal and Republicans should take it seriously," Reid said.
Citing public support, Reid said, "Republicans in Congress dismiss it at their peril."
Republicans argue that the payroll tax cut coupled with a tax increase on millionaires was bad economic and tax policy. They argue the temporary payroll tax break did little to create jobs and that the proposed tax increase on millionaires would stifle job creation.
Republican leaders in the Senate and House of Representatives have been struggling to stake out a unified position on the payroll tax cut.
Earlier this month, Republicans were reluctant to embrace Obama's call to extend the payroll tax cut, voicing concerns about the cost and whether it would stimulate the economy.
But with fears of a political backlash in the run-up to the November 2012 presidential and congressional elections, at least some of their leaders decided to push for an extension - provided an agreement can be reached on how to pay for it.
Last week, House Speaker John Boehner, the top U.S. Republican, declared that extension of the payroll tax cut would be a boost to the economy.
Obama took political aim at Republicans, who rose to power largely by opposing tax cuts, particularly on the rich.
"I know many Republicans have sworn an oath never to raise taxes," Obama said. "How can it be that the only time there's a catch is when it comes to raising taxes on middle class families?"
(Editing by Mohammad Zargham and Philip Barbara)