The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which President Obama signed into law on December 17, is being described as an $858 billion stimulus bill. But this is imprecise.
The immensely complex Act is well summarized in “CCH Tax Briefing: The 2010 Tax Relief / Job Creation Act,” Dec. 20, 2010, http://tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf (visited Dec. 25, 2010), which provides the following breakdown of the costs of the two-year program
Individual Tax Cuts .............$ 186 billion
AMT Relief ............................$ 136 billion
Payroll Tax Deduction ..............$ 111 billion
Estate/Gift Tax Relief .............$ 68 billion
Dividend Cuts .......................$ 53 billion
Expensing ............................$ 21 billion
Other .................................$ 226 billion
In addition to this $801 billion in tax relief, the Act authorizes a $57 billion extension of unemployment insurance benefits for a maximum of 99 weeks.
All these are just estimates, since the amount of tax relief depends on incomes, the size of estates, and so forth, and the amount of unemployment benefits depends on the number of claims made.
Most of the “costs” represent simply lost tax revenues; the Act extends tax cuts, made a decade ago, that would have expired at the end of this year—but the payroll (i.e., social security) tax deduction and extension of unemployment benefits, along with some of the other tax provisions, are new tax breaks. The benefits extension will probably expire at the end of the two years in which the new Act will be in effect, as unemployment falls. The other provisions of the Act are likely to be continued, given Republican hostility to any tax increases—and refusing to extend a temporary tax cut is rightly perceived as a tax increase. The Act illustrates the nature of compromise between the Democratic and Republican parties in the current political climate: each party seeks tax reductions for its constituents (the payroll tax deduction being the Democrats’ preferred form of tax break) and the Democrats in addition seek to increase spending (hence the extension of unemployment benefits).
The aggregate federal deficit is about $14 trillion, and is increasing at a rate of about $400 billion a year. All other things unchanged, the Act, assuming permanence, will almost double the annual increase in the deficit, putting the country farther along the road to bankruptcy—unless, as the Administration argues, the Act will operate as a stimulus (Keynesian deficit spending in a depression or recession) that will bring down the deficit by accelerating economic growth.
This would be unlikely if the tax breaks were new rather than for the most part merely continuations of the Bush tax cuts of a decade ago (I explain the significance of this qualification below).
The normal (not recessionary) rate of the nation’s economic growth is about 3 percent a year, but is usually much higher in the recovery period following a depression or recession. The economy is expected to grow by only about 3 to 4 percent in 2011; if the new Act added 2 percent to the higher figure, which I don’t think anyone expects, so that the Gross Domestic Product grew by about $800 billion (6 percent of our $14 trillion GDP), this would, it is true, reduce the rate of growth of the deficit. Suppose the additional $800 billion in GDP yielded $160 billion in additional federal tax revenues (20 percent). Then the 2011 deficit, instead of being roughly $800 billion, would be “only” $640 billion—we would still be on the road to bankruptcy.
Moreover, the benefits in deficit reduction from the Act would soon peter out; there is no basis for thinking that the level of taxation in the Act, compared to the higher tax level in the 1990s, will produce a higher rate of economic growth than the normal 3 percent.
It is nevertheless possible to defend the new Act on two grounds. The first, and I think less important, is that it indicates the possibility of compromise between the Obama Administration and the resurgent, and increasingly conservative and assertive, Republican Party, though compromise will be more difficult come January when the Republicans take control of the House of Representatives and significantly increase their representation in the Senate. Second, and more important, estimates that GDP would grow by at least 3 percent in 2011 were premised on the expectation that the bulk, at least, of the Bush tax cuts would be continued. Given the weakness of the economy, a sudden tax increase in 2011, which would have been the effect of allowing those cuts to expire, could easily have knocked one or two percentage points off the GDP growth rate.
It would have been better to have just continued the tax breaks and not have cut the payroll tax and extended unemployment benefits. A small, and possibly (though not probably) temporary, tax cut is unlikely to stimulate much spending, and extending unemployment benefits can actually increase unemployment by making unemployed workers more picky in their search for a new job. These provisions of the Act are simply the Democratic quid pro quo for the tax breaks for the wealthy, favored by the Republicans.