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  Tax Agreement is a Good Deal
We support the agreement reached with the White House late yesterday to extend the Bush tax cuts.  While far from perfect, it enhances the incentive to work and invest and promotes economic growth.  The deal says "lower tax rates are better than higher tax rates;" the deal says "certainty in policy is better than uncertainty."

The agreement extends all the Bush tax cuts on regular income, dividends, and capital gains through the end of 2012, exactly as we have been expecting since August.  Sure, we would have liked a permanent extension.  Heck, we want a flat tax...but, we are happy to avoid a tax hike and to win the argument on principle.

Instead of reverting to a top tax rate of 55% on estates – which would have happened in the absence of a compromise – the top rate on estates will be 35% for the next two years and the exemption amount will rise from $1 million (which it was scheduled to be) to $5 million.  Sure, we would prefer much higher exemptions, or, better yet, continuation of the zero tax rate.  But no one thought that was actually possible with the current president in the White House. 

Yes, this deal extends the availability of unemployment benefits for up to 99 weeks, through the end of 2011, and everyone knows unemployment benefits cause unemployment to remain elevated.  But with unemployment at 9.8% and with bipartisan support for unemployment insurance stretching back decades, this program was highly unlikely to suddenly go away.  We had been hoping for a gradual phase-out in the early part of 2011.  But, remember that over time the number of workers this will apply to is shrinking.  In other words, extended benefits will soon start having less of a negative impact on the labor market.

The trade off for an extension of unemployment benefits is full-expensing on plant and equipment for coporations for at least the next two years.  We say "at least" because we think it's likely that once enacted for two years that this part of the proposal morphs into a permanent feature of the business tax code, regardless of the election in 2012.  Trading a temporary boost in unemployment benefits (which stood no chance of being defeated) for full-expensing is a huge win for the economy.

And finally, the Social Security tax rate will be temporarily cut to 4.2% from 6.2% (for the employee, not employer).  This idea has been around for quite some time and is essentially, the "least bad" kind of Keynesian stimulus, the one least likely to do harm and most likely to support short-term growth.  For people earning above the $106,800 cap, the payroll tax cut is like a lump sum transfer of $2,136 per worker with zero change to incentives.  For most earners below the wage cap, it's a 2 point reduction in their marginal tax rate, with a small positive effect on the incentive to work.

Some conservative politicians and analysts are complaining about the tax cut deal announced last night.  Some are even considering not supporting it.  They do not like the extension of unemployment benefits and some income tax credits (for children, etc.) that the deal proposes to make available to more people at low income levels who don't actually pay income taxes anyhow.  This is not good policy.  However, when looked at in terms of total cost, these deals are still well worth the other improvements to policy.  In the end, the compromises are minor, not major.  The message of this deal is that "tax rates matter and lower rates are better."  The only good thing that could come of conservatives complaining about the deal is to entice some liberals, who might not have supported the deal in the first place, to find room to vote "yes."
Posted on Tuesday, December 7, 2010 @ 2:44 PM • Post Link Share: 
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