Tax Deal A Kick In The Pants For The Economy?

Despite his opposition to extending tax cuts for the wealthy, President Obama said Tuesday that he made a deal to do so with Republicans because his first interest is fixing the economy. But just how much will the tentative deal stimulate the economy and help create new jobs?

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The president said he accepted extended tax cuts for the wealthy in order to get a deal that helps the economy. So will it actually help?

We put that question to NPR's John Ydstie.

JOHN YDSTIE: In addition to retaining the Bush tax cuts for all income levels, the package includes a 13 month extension of unemployment benefits, a one-year cut in payroll taxes, and the extension of some business tax credits.

Economist Mark Zandi of Moody's Analytics says the total package will help the economy grow at a healthier pace and create jobs.

Mr. MARK ZANDI (Economist, Moody's Analytics): Instead of a year of job growth that's insufficient to bring down unemployment - we'd still be hanging around 10 percent for the year - this will bring enough job growth to bring down unemployment in a meaningful way by year's end.

YDSTIE: Zandi says the package should add about one percentage point to the growth rate next year.

But Bob Williams of the Tax Policy Center says the package includes several items that will do little for growth.

Mr. BOB WILLIAMS (Tax Policy Center): Cutting the estate tax is not going to have any stimulative effect. Patching the alternative minimum tax one more year will not stimulate the economy. Maintaining the Bush tax cuts for high-income individuals will not stimulate the economy.

YDSTIE: That's because high-income taxpayers are much more likely to save their tax cut than spend it, says Williams.

Mr. WILLIAMS: We know that people who are at lower incomes spend more of an additional dollar than do high-income folks.

YDSTIE: That's one reason that Williams and Zandi agree that the biggest bang for the buck in this package will come from extending unemployment benefits. They're likely to be spent, increasing demand in the economy, and helping to create jobs.

One of the highest profile provisions in the package is a two percentage point reduction in Social Security payroll taxes. Williams says that will not provide as much stimulus per dollar as the Making Work Pay tax cut in President Obama's original stimulus bill. That's because more of the payroll tax cut will go to high-income individuals.

Mr. WILLIAMS: Single people with earnings below $20,000 will get less under the payroll tax reduction than they got under Making Work Pay. Couples earning less than $40,000 will find themselves in the same situation. Those are the people most likely to spend money and yet you're reducing the tax cuts for them and putting less money in their pockets.

YDSTIE: For instance, a couple making $36,000 a year would get a payroll tax cut of $720 under the new plan. Under the Making Work Pay program, they were getting a tax credit of $800. That program expires at the end of the year and won't be extended by this new tax deal.

Meanwhile, a couple making $200,000 could get $4,000 from the payroll tax cut. That would be a pleasant surprise for higher-income households, who got little or nothing from the Making Work Pay program. It phased out for households with incomes over $75,000 a year.

In all, the package of tax cuts and unemployment benefits could cost the budget about $700 billion over the next two years, according to the White House. That means the federal deficit will remain around $1.3 trillion in 2011, says Mark Zandi. But, he says, it's a reasonable course of action under the circumstances.

Mr. ZANDI: Because it ensures that the economy will gain traction and grow, and a necessary condition for addressing our fiscal problems, at least over the longer term, is a growing economy.

YDSTIE: But, Zandi says, once the economy is growing again, policymakers will have to pivot quickly to address the deficit problem before it becomes a crisis.

John Ydstie, NPR News, Washington.

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