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The Tax Cut Deal As Less a Second Stimulus And More As A Continuation of 2010.

By Mike Konczal on 12/09/2010 – 8:10 am PSTLeave a Comment

One reason we shouldn’t think of this tax deal as a second stimulus is that it is really a continuation of the tax cut portions of the first stimulus and the baseline tax rates of 2010. Ezra Klein has posted some very helpful charts from the Center on Budget and Policy Priorities that show how the tax cut deal breaks down.

Most of the elements of the tax deal were already in effect in December 2010 and are set to expire in January 2011. My chart here is preliminary, as I have to check a few more things about what was expiring business tax credit wise, but this is what the situation looks like:

The tax deal is less a second stimulus, but rather an extension of some the most (UI) and least (tax cuts for the rich) stimulative polices from the baseline of December 2010.  Elements of the ARRA and the Bush tax cuts were set to expire, raising taxes in a weak recovery.  The real extra second stimulus of this bill is the Social Security payroll tax cut of $120bn, replacing the Making Work Pay tax cut of $60bn, for a net increase of $60bn.

With that in mind, let’s look at some macroeconomic projects of this deal for 2011. Macroeconomics Advisors estimate that this tax deal will boost GDP 0.5 to 0.75 next year over the baseline of 3.7%. Why is that?

In our just published economic forecast we had already assumed many of the elements of this compromise would be enacted. However, there are three major components that we had not assumed, and that would, in fact, together significantly impact the economic outlook over the next few years. First is the extension of emergency unemployment compensation through December 2011. In total this would add roughly $56 billion to personal disposable income through early 2012. Second is the one-year, two-percentage-point payroll tax reduction for employees that would add approximately $120 billion to disposable income in 2011. It should be noted, however, that the administration dropped its proposal that the Making Work Pay refundable tax credit be extended permanently, something we had also assumed in our forecast. Therefore, the net effect on disposable income in 2011 is only roughly $60 billion, relative to our forecast. Third is the new expensing and bonus depreciation through 2012 that would reduce corporate taxes by roughly $170 billion through 2012, with roughly $140 billion of that subsequently recaptured by the federal government because of smaller depreciation deductions in later years.

Macroeconomics Advisors’ simulation of the tax deal boosts GDP because unemployment insurance is extended and the Making Work Pay is dropped and replaced with the Social Security payroll tax holiday.  Excluding the depreciation element, the short answer is that they modeled that the country was going to drop $120bn in January as their baseline, and now they are adding $180bn.   We’ll experience it as just a $60bn increase out in the real economy

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Tags: , , , , , payroll tax reduction

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  3. Commodity Corner: Crude Rallies Ahead of Fed’s Stimulus Move
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  5. How the Stimulus Package Offers Small Business Tax Relief

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