Tax cut compromise may boost economy

Tulsa Business Journal
By Scott Meacham
Dec. 23, 2010

Much has been said about the possible negative impact of the expiration of the Bush tax cuts on Dec. 31. A compromise has been reached on extending the cuts between President Obama and Congressional Republicans. The big question now is whether the Democrats who still control Congress will embrace the compromise. They argue that taxes should be allowed to increase to help reduce the deficit.

The Bush tax cuts lowered income tax rates, lowered tax rates on long-term capital gains and dividends, doubled the child tax credit, eliminated the marriage penalty on married taxpayers filing joint returns and eliminated the phase out of personal exemptions and itemized deductions for higher income taxpayers. Most of the tax cuts were set to end on Dec. 31, 2010. Of course, no one realized what the U.S. economy would be like when the end date was originally set.

In early December, a compromise was announced on extending the cuts. Under the compromise, the tax cuts would be extended for two years, unemployment benefits would be extended for 13 months, employee share of payroll taxes would be cut by 2 percent, businesses would be allowed to expense 100 percent of investments in new property and equipment in 2011, the child tax credit would be extended, more taxpayers would be exempted from the AMT tax and estate tax rates would be cut to 35 percent after a $5 million exemption.

The question is what will be the impact on the economy if the compromise passes or the Bush tax cuts expire? Although the experts say the recession officially ended around June 2009, it does not feel that way with slow growth, high unemployment and a volatile stock market. Many are predicting that growth will remain sluggish and unemployment will continue to be stubbornly high for several years. The last thing an economist would advise in a recession or a period of slow economic growth is a tax increase.

It seems the problem with the economy is more psychological than anything else. This recession hit the cornerstone of the American economy, the Wall Street money center banks and brokerage firms, like nothing seen since the Great Depression. Public faith in financial institutions has been severely shaken and the big financial institutions have lost their swagger as they have struggled to plug gaping holes in their balance sheets. Adding to the confidence issues is uncertainty over governmental policy. This uncertainty among business and consumers leads a lack of new investment and spending required to pull the U.S. economy out of the fog of the recession.

A focal point for much of the uncertainty has been the Bush tax cuts. Other than a vocal minority, it seems no one believes the timing is right for the tax increase that the expiration of the cuts would cause. Perhaps the compromise is just the tonic the economy needs to pull itself out of the post-recession funk. It is not the inherent stimulus effect that the compromise offers that matters. Instead, the end to the lingering uncertainty and the boost to weak confidence that the compromise offers is what might get the economy on a better trajectory.

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