I want to be sold on this tax cut deal on the economics, but the more I look at it the less I’m impressed with it.
According to Ezra Klein, the White House is circulating this diagram around the Hill. James Kwak dissects this chart and the narrative that “Obama won” on this deal; I’ll do the same. Let’s take the “What We Got” apart.
Child Tax Credit From the Republican Pledge To America (pdf):
…these looming tax hikes will hurt every family in America. During the 1990s, a Republican Congress enacted pro-family policies such as marriage penalty relief and the child tax credit. Unless action is taken, a $3.8 trillion tax hike will go into effect on January 1, 2011 that will unravel these policies. A family of four with a household income of $50,000 a year will have to pay $2,900 more in taxes in 2011, according to a new analysis by Deloitte Tax LLP, a tax consulting firm. The same family making $100,000 a year will see its taxes rise by $4,500. In addition, the marriage penalty will return, the child tax credit will be cut in half, and the Alternative Minimum Tax will ensnare more than 25 million taxpayers.
The GOP take pride in creating and fighting for the continuation of this Child Tax Credit in their Pledge To America. It’s likely this could have been “got” without this deal.
Equipment Expensing This is unlikely to be stimulative, as per earlier research on this field. Really it just puts tax credits that are always extended informally into law. It saves lobbyists some time, but there is little reason to believe this will be very effective with demand so slack. Would the GOP really block this?
Unemployment Insurance Huge fan. Love to get into long discussions about the merits. This is a win. While we are at it, I also like the EITC. UI extensions are doing the major work in the estimates of GDP and employment growth in the estimates; that it is shut off after only a 13 month extension (and not extended beyond 99 weeks) puts another hostage into the ideological field of fire.
Payroll Tax Holiday I don’t see this as a huge stimulus and the more I investigate the less I’m impressed with it. Let’s go to Mark Zandi’s estimate of the multiplier on this:
It has less than a multiplier than the “Making Work Pay” fund it replaces and doubles-down on (literally, twice as much will be spent on the payroll tax credit), virtually a one-for-one on the spending. (Most of Zandi’s results on this tax compromise are driven by the unemployment insurance.) Compared to infrastructure spending, it’s nothing. This will continue the weakest parts of the original ARRA, the tax cut portion, but this time weaker while branding it as the Democratic option.
This will likely pay down private debt, replacing it with public debt and doing little to rebuild the economy. And if there’s a hit to housing values in 2011, it’ll be erased completely. Getting banks to write down MBS portfolios to actual values would likely do much more.
And what is worse, Dean Baker is officially worried about how this will impact Social Security. Dean is someone I trust more than anyone on the battles around Social Security, so if he is worried I am now really worried:
The logic is that the tax cut is scheduled to expire in December of next year. While it would require new legislation to extend the cuts, the Republicans will describe the failure to extend the cuts as a tax increase on middle class workers…Democratic officeholders have had difficulty standing behind tax increases for the very richest people in the country. It is difficult to imagine them sticking their necks out for tax increases that will hit low and middle-income workers, especially in a context where unemployment is virtually certain to be above 8.0 percent and quite likely above 9.0 percent. This means that the reduction in Social Security taxes may not be for just one year, it may persist for the indefinite future…
Unfortunately, the Obama administration cannot be counted on to defend the program either…In short, supporters of Social Security have good reason to oppose the tax deal. It is easy to have the same stimulus with an expanded version of President Obama’s Making Work Pay tax cut. Supporters of Social Security should reject the latest deal and tell President Obama to stand behind his own tax cut. This is what presidents are supposed to do.
I don’t find these extra “gots” particularly credible as stimulus, and I’ve become less impressed as the week has gone on and I discuss it with more people. If we can get the tax cuts for 2 years on the $250,000 and below and the UI extensions, why not take it and go home? Are we certain we can’t get it without fighting for it, especially now that we know what the stakes are?