Tax Cut Extension Stirs Mixed Reaction

Tax cuts for all Americans will be extended for another two years if the deal struck between President Obama and Congressional Republicans, is passed and signed into law. Some Democrats are disappointed with the agreement, saying the tax cuts for the wealthiest Americans should have been allowed to expire. The plan would also extend jobless benefits for the long-term unemployed. Host Michel Martin speaks with Wall Street Journal Economics Reporter Sudeep Reddy and regular financial contributor Alvin Hall about implications for average Americans.

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MICHEL MARTIN, host:

I'm Michel Martin and this is TELL ME MORE, from NPR News.

Tax cuts for all Americans will be extended for another two years if the deal struck between President Obama and congressional Republicans last night is passed and signed into law. The plan would extend the Bush era tax cuts for all Americans and also extend jobless benefits for the long-term unemployed.

Now, some Democrats have expressed disappointment with the agreement, saying the tax cuts for the wealthiest Americans should have been allowed to expire. In a few minutes, our regular contributor on matters of personal finance and the economy, Alvin Hall, should be with us to break down what this agreement will mean to us as individuals.

But, first, we wanted to hear more about the political and economic aspects of this deal, so we've called, once again, Wall Street Journal economics reporter Sudeep Reddy who's with us now from his office in Washington.

Thanks so much for joining us. Late night for you, I'm afraid.

Mr. SUDEEP REDDY (Economics Reporter, The Wall Street Journal): It's good to be with you, Michel. Thank you.

MARTIN: So, tell us the broad outlines of the deal.

Mr. REDDY: Well, this includes an extension of all the Bush tax cuts at all income levels for two years. That's what's been debated so much over the past few months. It also includes 13 months of extended unemployment benefits. And those are benefits for some of the people - two million people would've seen their benefits go away this month if this hadn't been extended.

It includes something that's been discussed, but hasn't really been proposed in Congress yet. A two percent reduction in payroll taxes next year. So for somebody earning $50,000 a year, that's a $1,000 next year that they will get in their bank accounts that they wouldn't have had otherwise.

MARTIN: Is that everybody? Is everybody included in that?

Mr. REDDY: It affects anyone who works. And it affects all income up to $107,000 a year. So it's something that will go across the income scale for people up to that point.

MARTIN: And what's the total cost of this package and dare I ask, how is this paid for?

Mr. REDDY: Well, the overall package, if you were to consider the two-year impact of this, you're looking at about $900 billion, both for the tax extensions that we're talking about. The payroll tax cut is about $120 billion for just 2011. And there are some aspects of this, the unemployment benefit extension. All of these, in terms of new tax breaks or additional stimulus, as you can consider it, is about $200 billion that's going to be coming in on top of the tax cuts.

MARTIN: Now, the White House is saying that this proposed tax deal will not worsen the medium and long term U.S. deficit. How is that possible?

Mr. REDDY: Well, it will certainly affect the short term deficit. Any time you're borrowing money like this, it adds to the debt, and that's going to become an issue. That's money that is eventually going to have to be paid down in some form. Because this is structured as a two-year deal, it doesn't affect the long-term trajectory of spending. And that's what they're, the point they're making is it is something that you'll have to eventually pay for, but it doesn't create a mounting problem that just gets worse every year, in that sense, when you normally talk about the long-term and medium-term deficit. But it is a cost and it's a cost that they're really kicking down the road.

MARTIN: I'd like to ask you about the reaction to this, particularly among the lawmakers who will have to vote on it. The initial reactions were pretty positive on the Republican side, but some of the Democrats are just outraged about this. And it's interesting because you'd think that they would be - many of them were very worried about unemployment benefits expiring for many people who've been long-term unemployed. But they don't seem to be as happy about that. So, talk to me about the initial reaction.

Mr. REDDY: Well, Michel, there's no question that the president lost politically here, and he gave up more, politically, than the Republicans did. He campaigned on ending the tax brackets, for the tax cuts for the highest income brackets and for making the lower brackets permanent for middle class Americans. And he didn't get the permanency on that either.

So, liberal Democrats have been standing their ground on this issue, philosophically, to define the difference between them and Republicans. And President Obama essentially gave that up. He gave it up for a reason, that his overriding concern has to be the state of the economy, even if he has to compromise politically. And the president will have a tough time winning reelection in two years if the economy doesn't start improving and start improving quickly.

And, so, for instance, if these tax cuts were not extended because he decided to stand on political ground, the economy would've been hit with a shock at a really precarious time for middle class and upper middle class Americans, and he was willing to give up something politically for that. But the people who had been supporting other elements of this are getting something Democrats in the House wanted, extension of unemployment benefits, and they got it. And Republicans didn't necessarily get everything they wanted in terms of permanency of the upper brackets.

MARTIN: Just briefly, we're going to hear from Alvin in just a minute. But I wanted just to ask, just what are the dimensions of this for individual taxpayers and obviously that will depend on what your income is. But Sudeep, before we let you go, there was this - Republicans are saying that they wouldn't vote for anything that wasn't paid for. This doesn't seem to have been paid for. So, tell me about that side of the equation.

Mr. REDDY: That's right. They were using that as an argument that they weren't going to support anything that isn't paid for, but you can usually get Republicans to support some kind of a tax cut. And this is a little different than the tax cut that President Obama included in the stimulus plan. This would actually reach, some degree, more workers than it did before.

And so whenever you package something as a tax cut, Republicans will usually stand with it. The unemployment benefits is something that will not be paid for, at least for what it seems, right now. But that was a concession that they were willing to make and as anyone who studies unemployment benefits knows that that's something that goes straight into the economy. People who are unemployed are not holding onto that money or hoarding it any way. You go out and spend it because you don't have a job. And so that's an immediate stimulus.

MARTIN: All right. Sudeep Reddy covers economics for The Wall Street Journal. He was with us from his office. Thank you, Sudeep.

Mr. REDDY: Thank you, Michel.

MARTIN: And, Alvin, let's turn to you now. What's the most important part of this deal from your perspective, particularly for individuals?

ALVIN HALL: The most important is the extension of unemployment benefits for the millions of people who are unemployed and have been so for so long. And the second aspect - all the credits that's there for the average person. The earned income tax credit, the child tax credit - all those things put money into the hands of people who really need this money now, when their salaries are remaining stagnant, or they have children in college, they can write down those expenses now. All of those things help middle class people in America.

MARTIN: And what about this - the part - what Sudeep told us about this payroll tax reduction, which affects anybody who works? How significant is that? Is that not something that we'd heard a lot from, you know, the progressive wing of the Democratic Party? We have not heard a lot about that from - over the course of the last couple of days. And then this has now resurfaced. What about that?

HALL: It's been an idea that's been out there for awhile. That if you reduce what people pay into the Social Security benefits, which is currently at 6.2 percent, then that money would go back into their hands. Right now if you earned $50,000, I think you will end up getting around $1,000. $70,000, you will get $1,400. And I think it caps out around $2,138 at the top.

So, the idea is that by reducing the payment into the Social Security system over a period of time, that, again, you are putting more money into the hands of people. The problem with this is that they're going to have to then borrow money in order to support Social Security. And therefore they may be undermining the long-term viability of the program. They're saying this is not true, but it makes me wonder.

MARTIN: And now, finally, Alvin, I'm going to ask you for your opinion here. We have about a minute and a half left and you're a commentator, so I think it is appropriate to ask you your opinion.

HALL: Yes.

MARTIN: You've been part of our conversations over the last week where we talked both about the recoveries, you know, you were part of our Show Me the Recovery series.

HALL: Yes.

MARTIN: And we've also talked about reducing the national debt. As a matter of policy, what's your perspective on this? Do you think it strikes the right balance between sort of stimulus and worrying about the long-term issues, in your opinion?

HALL: In my opinion, I think that President Obama compromised a bit too much. I think that he's focused, as he should, on the needs of average people who need to put food on the table and who do have demands on their money coming up during this holiday season and afterwards.

However, by keeping the capital gains tax so low, by not raising taxes on the very wealthy, he has just put into place a whole series of compromises that over the long term will undermine the viability of the recovery. Rich people don't go out and spend money. What they do, they save it and they invest it. So, it's not going to cause people to get better jobs. It's not going to cost people to get jobs at all. It's going to help only the rich. So I think he's actually compromised too much and the long-term problem will still be the rising deficit and he has not addressed that - to me - effectively.

MARTIN: Wow. We'll hear more about this, obviously, in the days ahead. That's Alvin Hall. He's our regular contributor on matters of personal finance and the economy. He's with us from our bureau in New York.

Earlier you heard from Sudeep Reddy. He's an economics reporter for The Wall Street Journal. He joined us from the paper's offices in Washington.

Alvin, thank you.

HALL: You're most welcome.

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