Tax Cuts and Unemployment Insurance

Tuesday, December 07, 2010

By MERRILL GOOZNER, The Fiscal Times

Mounting concern about the nation’s faltering economy largely drove President Obama and Republican leaders to reach agreement late Monday on a plan to expand the Bush-era tax cuts into a two-year, $984 billion stimulus plan that will reduce taxes for nearly every citizen and business in America.

“My first job is to make sure the economy is growing, that we’re creating jobs out there and that people who are struggling are getting some relief”, Obama said at a Tuesday afternoon White House press conference. “And if I have to choose between having a protracted political battle on the one hand but those folks being hurt, or helping those folks and continuing to fight this political battle over the next two years, I will choose the latter.”

The deal would extend George W. Bush administration tax breaks for families at all income levels for two years, extend emergency jobless benefits through 2011 and cut payroll taxes by 2 percentage points for every American worker through the end of next year.

While political analysts were quick to declare winners and losers in the White House negotiations, the only real losers appear to be the nation’s deficit hawks, who only last Friday reveled in what appeared to be the fiscal commission’s bipartisan consensus to reduce deficits by nearly $4 trillion over the next decade. If the Obama-GOP package passes Congress, budget balancers will see the debt grow by an additional $1 trillion, because none of the proposed tax breaks and spending will be offset by cuts in other areas.

Leading economists say that more stimulus is needed to stimulating the economy to prevent an anemic recovery from stalling entirely.
The compromise plan announced Monday would achieve its stimulus through the tax code, not through additional investment in infrastructure, research and human services which is preferred by liberals.

Even Federal Reserve Board chairman Ben Bernanke made a rare appearance on national television last weekend to warn that additional policy measures were needed after a weak showing in the private sector last month drove unemployment to 9.8 percent. “At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate.” Bernanke said on CBS’s 60 minutes.”

While some liberal Democrats may revolt over extending tax cuts for households earning over $250,000 for an additional two years - a clear reversal of President Obama’s pledge to hold the line on additional tax cuts for the rich most will probably endorse the package, according to some analysts.

The compromise creates a $120 billion payroll tax holiday for people earning less than $106,800 a year; the middle class would benefit from the overall extension of the Bush tax cuts; the agreement extends unemployment benefits for the long-term unemployed for a total of 112 weeks; and it gives businesses that invest in depreciable plants, machinery and software a major new tax break, worth an estimated $146 billion in reduced corporate taxes next year.

“President Obama won policies that will put or keep money in the pockets of the families of the unemployed and middle and low-income families, which will increase spending and create jobs,” said Lawrence Mishel, president of the left-leaning Economic Policy Institute. http://www.epi.org/ “That’s what a payroll tax holiday for workers, unemployment benefits and the various tax credits will do: create customers for business and create jobs, which is our biggest need right now.”

While it was largely overlooked during the Bush-era tax cut extension debate, families earning less than $88,000 a year were due to be hit with a tax increase after January 1 when the so-called “make work pay” tax credit, which was part of the president’s original stimulus package, expired. Overall, taxes for those families would rise by $60 billion a year.  That clearly weighed heavily on White House negotiators.

Now, those families are slated to get a two-percentage point cut in payroll taxes, which is worth at least $400 for workers earning $20,000 a year and up to $2,136 for workers earning at the maximum amount taxed for Social Security, currently $106,800. In addition, the government will credit the Social Security trust fund for all the lost tax revenue, which means the insolvency date for the nation’s retirement program won’t be shortened by the tax holiday.

Most people earning less than $100,000 spend almost everything they earn according to economists. But whether this new tax package will succeed in lifting the economy onto a sustainable growth path is already being hotly debated.