continuing the "tax cuts" for two more years: macro and political implications

This is a mixed bag for the macro-economy. More debt and the clear and prospective troubles in brings. Lower marginal tax rates to stimulate consumption and production; other reduced taxes to stimulate consumption; and most important, lessening the uncertainties of public policy. But will it be enough-- along with expectations of what will [or won't] happen the next two years?-- to allow the economy to recover quickly (doubtful) slowly (most likely), or not at all.

This would seem to be a political victory for the GOP in Congress. Directly, they get a significant legislative victory. In the long-run, Obama's decision to make this two years (instead of longer) puts the GOP in the driver's seat for 2012, as voters will again consider who they want in charge when the topic of taxes comes up again then. (UPDATE: Both of these bother more liberal Democrats-- since it shows "self-abasement" from Obama, defers to the GOP in compromise rather than leadership, and maybe most important, that it ratifies an important and hated policy from the Bush adminstration.)

And it's a victory for Obama and bipartisanship (for the first [significant] time in his administration?). It also makes his election in 2012 more likely-- both because he is pursuing more moderate policies and is signaling that he can govern effectively with a more moderate Congress.


From the AP's Jim Kuhnhenn and David Espo in the C-J...

Brushing past Democratic opposition, President Barack Obama announced agreement with Republicans Monday night on a plan to extend expiring income tax cuts for all Americans, renew jobless benefits for the long-term unemployed and grant a one-year reduction in workers' Social Security taxes. The emerging agreement also includes tax breaks for businesses that the president said would contribute to the economy's recovery from the worst recession in eight decades...

Officials said that under the plan, unemployment benefits would remain in effect through the end of next year for workers who have been laid off for more than 26 weeks and less than 99 weeks. Without an extension, 2 million individuals would have lost their benefits over the holidays, the White House said, and 7 million would have done so by the end of next year.

To some extent, this necessarily undermines the recovery, since people are being subsidized to remain unemployed. At first, I thought they said 13 weeks-- which would have been far better. (Here's another problem with extending UI: states are having to borrow money from the Feds and increase state payroll taxes to finance UI spending!)

The Social Security tax cut would apply to workers, not employers, and would drop from 6.2 percent of pay to 4.2 percent for one year. The White House said the result would be to fatten take-home pay by $120 billion over the course of the year...

This helps all workers, especially those on the lower end. But this is short-term and uses debt to promote consumption.

From what I read elsewhere, the most notable tax break for businesses was full write-off for new capital expenditures. Although artificial, this could give the economy a short-term boost. Of course, aside from distorting incentives, the concern would be that this will encourage investment in 2011 but discourage it in 2012.


UPDATES: The payroll tax cut will use deficit financing leading to a temporary increase in consumption for workers; the unemployment insurance extension will use deficit financing leading to a temporary increase in consumption for non-workers. In a word, more "stimulus"-- targeting consumption and short-term production at the expense of long-term production and economic health. All things equal, this gets in the way of economic recovery.