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Tax cut deal: Extends current programs, provides little spur to job growth

Had the White House not reached this deal with the
Republicans, about $700 billion in tax cuts and unemployment insurance benefits
would have expired over the next two years, a cut in business and household
after-tax incomes equal to about 2.5 percent of GDP each year. This is a hit
the economy could ill afford.

As a result of the tax compromise, workers unemployed for
more than 26 weeks will be able to continue collecting federal unemployment
benefits for the next 13 months. With unemployment hovering just under 10
percent, and 40 percent of the unemployed jobless for more than 26 weeks, cutting
these benefits could have meant destitution and despair for millions of
workers. Unfortunately, many of the benefits of the tax cuts go to high
earners, who did especially well in the compromise deal. For upper income
households, the deal provides a 2-year extension of the Bush tax cuts, keeps
the maximum tax rate on stock dividends at 15 percent, keeps the maximum tax
rate on capital gains at 15 percent, retains the tax loophole that taxes the
millions earned by private equity managers at 15 percent, and exempts estates
up to $5,000,000 from inheritance taxes and sets the tax rate on inheritances
in excess of $5 million at 35 percent, the lowest since 1931 (not counting this
year when it was allowed to lapse entirely). Middle class and working families will
continue to receive the Bush tax cuts and marriage penalty tax relief, will
have access to the $1,000 refundable child tax credit and to a tax credit for
higher education tuition expenses and, for low-income working families, the
earned income tax credit expansion. The tax cut deal also extends the R&D
tax credit and other business tax breaks for two years. Thus, the bulk of the
tax relief in the compromise deal goes to keep programs that were in effect in
2010 from expiring in 2011.

The tax cut deal does include some modest new help for the
economy. A one-year 2 percent reduction in employee payroll taxes, worth about
$120 billion to working families, replaces the Making Work Pay tax credit,
worth about $60 billion, that will now be allowed to expire. Businesses will
get to expense 100 percent of business investment in 2011 and 50 percent in
2012 – a potentially large tax cut for new investment in the next 2 years that
is partly repaid in subsequent years. Together, this amounts to about $100
billion in new tax cuts in 2011 compared to 2010 with a further boost for
business investment in 2012.

While the tax compromise means policymakers in Washington
have not made things worse, little in this deal promotes economic expansion and
job growth. Tax cuts are the least effective means of spurring growth. The $60
billion in additional tax relief from the payroll tax cut will likely translate
into $30 to 40 billion of spending, a very small stimulus to economic growth of
less than 0.3 percent of GDP. This is a very modest boost to a still-fragile
recovery and weak economy that is far below its potential to produce goods and
services.

Likewise, the $75 billion going to upper income households
as a result of their inclusion in the extension of the Bush tax cuts will
likely translate into just $25 billion of extra spending. There are much better
things to do with this money. Using the $75 billion to expand the food stamps
program would translate into $129 billion in spending; using it for
infrastructure spending would translate into $118 billion; and using it for
general aid to state governments facing large deficits and layoffs would
translate into $106 billion.

The deal the president cut with his Republican adversaries
is far from the best use of these funds and far too small to get job growth
back on track. But the White House, which remains concerned about the health of
the economy, has managed to get a deal that at least respects the basic tenet
of the Hippocratic oath: First, do no harm.

Eileen Appelbaum is a senior economist with the Center for
Economic and Policy Research and president of the Labor and Employment
Relations Association.

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