Paul Revere by Cyrus Dallin, North End, Boston



Wednesday, December 8, 2010

Robert Greenstein, Executive Director, on the Tax Cut-Unemployment Insurance Deal

Robert Greenstein

"The deal between President Obama and Republican leaders on tax cuts and unemployment insurance has two substantial positive aspects: its surprisingly strong protections for low- and middle-income working families and its stronger-than-expected boost for the economy and jobs. But it also has two deeply disturbing negative features: not only the extension of the high-end income-tax cuts, but also an egregious estate-tax giveaway that Senator Jon Kyl demanded for the estates of the wealthiest one-quarter of 1 percent of Americans who die.

Congress should approve this package — its rejection will likely lead to a more problematic package that does less for middle- and low-income workers and less for the economy. Then, in 2012, when the economy should be stronger, the President should make clear he will veto any legislation to extend either the high-end tax cuts or the weakening of the estate tax beyond the estate-tax parameters that were in place in 2009, and he should take that case to the country.

The Positives in the Package

In several respects, the package exceeds the expectations we and many other observers had set when the negotiations began.

■The 13-month extension of federal unemployment benefits is a major accomplishment. Only a few weeks ago, the House fell short of passing a three-month extension. The 13-month extension will prevent 7 million jobless workers from losing essential income support, without which they would have to cut their purchases substantially, causing the loss of many more jobs. The Council of Economic Advisers recently estimated that an end to these benefits would cause the loss of 600,000 ­jobs and cut already-inadequate economic growth by 0.6 percentage points by the end of next year, quite a large amount; Goldman Sachs recently made a similar estimate of the impact on economic growth.

■The package continues for two years all of the 2009 Recovery Act improvements in the Earned Income Tax Credit, the American Opportunity Tax Credit (which helps students from low- and middle-income families afford college), and the refundable component of the Child Tax Credit. These measures are simultaneously effective stimulus policy, desirable social policy, and admirable anti-poverty policy. They encourage work over welfare and help more Americans obtain a college education; they provide sound stimulus by putting money in the hands of hard-pressed working families that will spend it; and they substantially reduce child poverty.

■The package also contains a one-year reduction of 2 percentage points in the employee share of the Social Security payroll tax; workers will pay a 4.2 percent tax on their first $106,800 in wages, rather than 6.2 percent. This provision, which would replace the current “Making Work Pay” tax cut, would raise workers’ take-home pay by $120 billion in 2011 (relative to current law) and consequently should provide some economic boost.

These provisions would protect low- and middle-income workers and their families and, by boosting their incomes, also preserve or create substantial numbers of jobs. Mark Zandi, chief economist of Moody’s Analytics, estimates that federal unemployment benefits generate $1.60 in economic activity for every dollar in cost; the refundable tax credits generate about $1.20 to $1.40 in activity for each dollar in cost; and the payroll tax reduction generates about $1.25 for each dollar in cost. In other words, all of these measures rank high in “bang-for-the-buck” effectiveness.

In this part of the package, the White House achieved everything it sought for low- and middle-income families. It apparently did not compromise on these issues."


Tomorrow:  The negatives

1 comment:

Infidel753 said...

Good points once again. The extension of unemployment benefits is the big one. It's the demand for goods and services, not tax rates, that drives job creation -- reducing millions of people's income would cut demand, which is the last thing we need to do right now.