Senate nears passage of $858 billion tax-cut deal

McClatchy NewspapersDecember 14, 2010 

WASHINGTON — The $858 billion tax-cut deal moving through Congress will jolt life into the struggling U.S. economy over the next two years, but faces one more major hurdle first — passing the House of Representatives despite Democrats angry about its estate tax and Republicans upset about its mammoth deficit spending.

The Senate was expected to pass the deal overwhelmingly late Tuesday or early Wednesday, drawing a breadth of bipartisan support previously unseen during Barack Obama's presidency. Next stop is the House, which could vote as soon as Wednesday and where eventual passage is expected despite reservations on all sides.

Economists figure the deal should boost economic growth by up as much as a full percentage point in 2011 and lower the unemployment rate, now 9.8 percent, to as low as 8.7 percent by year's end.

The plan, negotiated by Obama administration and GOP officials, would extend all Bush-era tax cuts, first enacted in 2001 and 2003, for two years. It also would cut the Social Security payroll tax for workers by 2 percentage points next year and provide 13 months of jobless benefits for the long-term unemployed. And it would tax individual estates of more than $5 million at a 35 percent rate.

Leading economists have blessed the deal on grounds that it'll juice up the moribund U.S. economy — but just how much is debatable.

"The package would result in real GDP growth in 2011 of about 4 percent, and before the package we were expecting growth of about 3 percent," said Augustine Faucher, a director at economic forecaster Moody's Analytics.

Growth that strong would boost payrolls by 2.6 million jobs — twice as many as Moody's projected before the deal — and lower the jobless rate to 8.7 percent by year's end instead of staying stuck at 9.8 percent, Moody's calculates.

The biggest boost, Faucher said, wouldn't come from extending the tax rates now in place, but from extending unemployment benefits for the long-term unemployed, expanding some business tax breaks and the proposed one-year payroll tax holiday.

Extending the tax cuts for the wealthiest Americans, whose tax rate was set to jump on Jan. 1 by about three percentage points, won't translate into more consumer spending, according to economists, because the rich tend to save more. That doesn't mean, however, that there isn't benefit from retaining the lower rates for everyone.

"In the current environment, you don't want to do anything to upset the apple cart. Right now we've got an economy that's growing ... but if something happens like there is a big (debt) default in Europe, that could knock the economy enough to push it back into recession," Faucher said. "So it makes sense to hold off on the tax increases . . . until the economy can withstand that kind of shock. It's more prudent."

The Moody's projection is optimistic. Other forecasters are less upbeat, particularly about bringing down the unemployment rate.

"Unfortunately, I'm of the view that unemployment stays sticky, at a higher level, for a longer period of time. That's truly a challenge for policymakers," said John Silvia, the chief economist for Wells Fargo Securities in Charlotte, N.C.

The deal's $858 billion price tag is a downside — it's larger than the controversial $814 billion economic stimulus Congress approved last year. It would send federal budget deficits soaring beyond last year's $1.29 trillion. That could lead investors in U.S. government bonds to demand higher returns because U.S. debt is worrisomely high, sending interest rates up and crimping the economy anew, but few experts consider that threat imminent.

Although the deal's positive impact on the economy is a key selling point, many House lawmakers still want to be convinced.

Many Democrats are incensed about the estate tax provision, and economists agree that it would have no impact on the economy's recovery. House Democratic leaders say that plan alone will add $25 billion to the deficit while providing tax relief to 6,600 of the country's wealthiest estates. Rep. Robert Scott, D-Va., called it "particularly offensive."

Twenty-eight centrist House Democrats wrote a letter to the White House, reminding that their goal is to help the middle class and promote growth. "The estate tax as proposed does not meet those goals," the lawmakers wrote.

Democrats want to set a 45 percent tax on estates of more than $3.5 million rather than the compromise plan's 35 percent tax on estates of more than $5 million.

Problem is, the White House and Senate leaders want no changes in the deal's terms. They warn that any change would imperil the whole delicately crafted legislation.

If the House does change the estate tax terms, the Senate's unlikely to accept it, and would kick the current plan back to the House, which then probably would accept it rather than let tax rates rise on all Americans on Jan. 1. Alternately, the House may try to pass the higher estate tax separately.

Part 2 of Kevin G. Hall's interview about the tax cut compromise. (Video by the Real News Network)

Some conservatives voice other reservations, largely about the deficit. The Tea Party Patriots are circulating an online petition urging lawmakers to reject the deal.

"'The Deal' spends billions and billions of dollars that the country does not have in order to prevent a tax hike that the country voted against. In essence, the GOP bribed the president to follow the will of the people," it argues.

Some House deficit hawks doubtless will agree. For all that, enactment of the White House-GOP plan is likely before Christmas.

ON THE WEB

Moody's Analytics analysis

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