Ezra Klein puts forth the case that the tax compromise of a full, rather than partial, extension of the tax cuts is a stimulus effort, both in itself and as a means of securing additional stimulus (“The tax cuts for income over $250,000 will pump about $100 billion into the economy over the next two years. It’s not the most stimulative way to spend $100 billion, but it’s more stimulative than not spending it, or than raising taxes”). David Dayen asks Is the Tax Cut Cave a Stimulus Gambit?, wondering what the political ramifications will be down the line and how much this will stimulate the economy.
Luckily this has been studied. Let’s hand the microphone to Douglas W. Elmendorf, Director of the Congressional Budget Office. Specifically, here, and his testimony and slides for The Economic Outlook and Fiscal Policy Choices, September 28th, 2010. Slide 14 (my red boxes):
And from the full testimony:
According to CBO’s estimates, all four policy options would add to income and employment in 2011 and 2012, largely because they would increase after-tax income and thereby encourage people to spend more. In 2011, for example, by CBO’s estimates, the partial extension of the tax cuts through 2012 would increase real GNP by between 0.2 percent and 0.7 percent, reduce the unemployment rate by between 0.1 and 0.3 percentage points, and add between 0.3 million and 0.7 million full-time-equivalent jobs (see Table 3).
The full extension of the tax cuts through 2012 would increase GDP and employment more in 2011 and 2012 than would the partial extension through 2012 because it would have a greater overall impact on after-tax income. However, the economic impact per dollar of revenue reduction from the full extension would be smaller than that from partial extension because a greater proportion of the tax savings from the full extension would go to relatively high income households, which tend to spend less of an increase in income than lower-income households do.
The full permanent extension and partial permanent extension of the tax cuts would have larger economic effects in the next two years than would the corresponding extensions through 2012 because people tend to spend a larger portion of permanent changes in after-tax income than of temporary changes. However, the economic effects in the next two years, per dollar of revenue reduction over the long run, would be smaller than those of the corresponding temporary extensions because the revenue loss would continue for many more years.
To clarify: The high estimate of extending the full tax cuts instead of the partial tax cuts on the unemployment rate is reducing it by 0.1% by 2012 (and not at all in 2011), with a 2012 high-end estimate of new full-time equivalent employment of 300,000. The low estimate is zero on the unemployment rate in 2011 and 2012, with a full-time equivalent employment of 100,000. I sincerely hope they are going to get a lot else at the bargaining table, given the outpouring of public reaction when the deficit increases but unemployment barely nudges as a result of this move.