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Wednesday, December 22, 2010

The Net Impact of the Tax Deal

Dean Baker says the impact of the tax compromise may not be as large as you've been led to believe:

Obama's tax deal: read the small print, by Dean Baker: ...While the economy will do better with this tax package..., much of the discussion has exaggerated the potential stimulus to the economy.
First, it is important to remember that although the total package is scored as costing almost $900bn over two years, almost everything in this package simply leaves in place current tax rates and spending. ...
The only net stimulus in this package comes from replacing the $60bn Making Work Pay tax credit in 2011 with a $110bn reduction in the payroll tax and the allowance full expensing of new investment. The latter is projected to cost $55bn a year for the next two years. The full expensing ... replaces a provision of the 2009 stimulus package that provided for 50% expensing, which means that the net boost ... is half this size.
In sum, the net stimulus for the economy from this package in 2011 will be in the range of $70bn... This is not likely to provide a substantial boost to growth.
While the tax deal will be a net positive to growth for 2011, there are many other factors that are pushing in the opposite direction. First, much of the spending in the original stimulus package will be coming to an end in the first two quarters of 2011. ... State and local governments continue to face large budget shortfalls. ... House prices are once again falling..., another blow to consumption... Another factor depressing consumption is the recent bump in interest rates. ... It is also important to recognize ... the rate of inventory accumulation ... is likely to slow – meaning that inventories will be a net drag on growth in coming quarters.
In sum, there is every reason to expect that 2011 will be another year of weak growth, with little, if any, decline in the unemployment rate. The economy will be somewhat stronger as a result of this tax package being put in place, compared to a scenario in which nothing was done, but this is very far from the fabled "second stimulus" that some are acclaiming.

There is also likely to be a push for deficit reduction early next year. If this push is successful, and that's a possibility that can't be ruled out, it could more than offset the stimulus from the tax deal.

    Posted by on Wednesday, December 22, 2010 at 02:16 AM in Economics, Fiscal Policy, Taxes | Permalink  Comments (31)


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