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December 2010, Week 2

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Wed, 8 Dec 2010 22:30:15 -0500
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The Positives and the Negatives - What Comes Next?

Center on Budget and Policy Priorities (CBPP) Statement:

Updated December 8, 2010
For Immediate Release

http://www.cbpp.org/cms/index.cfm?fa=view&id=3340

Statement: Robert Greenstein, Executive Director, on the Tax
Cut-Unemployment Insurance Deal

The deal between President Obama and Republican leaders on
tax cuts and unemployment insurance has two substantial
positive aspects: its surprisingly strong protections for
low- and middle-income working families and its stronger-
than-expected boost for the economy and jobs. But it also
has two deeply disturbing negative features: not only the
extension of the high-end income-tax cuts, but also an
egregious estate-tax giveaway that Senator Jon Kyl demanded
for the estates of the wealthiest one-quarter of 1 percent
of Americans who die.

Congress should approve this package - its rejection will
likely lead to a more problematic package that does less for
middle- and low-income workers and less for the economy.
Then, in 2012, when the economy should be stronger, the
President should make clear he will veto any legislation to
extend either the high-end tax cuts or the weakening of the
estate tax beyond the estate-tax parameters that were in
place in 2009, and he should take that case to the country.

The Positives in the Package

In several respects, the package exceeds the expectations we
and many other observers had set when the negotiations
began.

   * The 13-month extension of federal unemployment benefits
   is a major accomplishment. Only a few weeks ago, the
   House fell short of passing a three-month extension. The
   13-month extension will prevent 7 million jobless workers
   from losing essential income support, without which they
   would have to cut their purchases substantially, causing
   the loss of many more jobs. The Council of Economic
   Advisers recently estimated that an end to these benefits
   would cause the loss of 600,000 -jobs and cut already-
   inadequate economic growth by 0.6 percentage points by
   the end of next year, quite a large amount; Goldman Sachs
   recently made a similar estimate of the impact on
   economic growth.

   * The package continues for two years all of the 2009
   Recovery Act improvements in the Earned Income Tax
   Credit, the American Opportunity Tax Credit (which helps
   students from low- and middle-income families afford
   college), and the refundable component of the Child Tax
   Credit. These measures are simultaneously effective
   stimulus policy, desirable social policy, and admirable
   anti- poverty policy. They encourage work over welfare
   and help more Americans obtain a college education; they
   provide sound stimulus by putting money in the hands of
   hard-pressed working families that will spend it; and
   they substantially reduce child poverty.

   * The package also contains a one-year reduction of 2
   percentage points in the employee share of the Social
   Security payroll tax; workers will pay a 4.2 percent tax
   on their first $106,800 in wages, rather than 6.2
   percent. This provision, which would replace the current
   "Making Work Pay" tax cut, would raise workers' take-home
   pay by $120 billion in 2011 (relative to current law) and
   consequently should provide some economic boost.

These provisions would protect low- and middle-income
workers and their families and, by boosting their incomes,
also preserve or create substantial numbers of jobs. Mark
Zandi, chief economist of Moody's Analytics, estimates that
federal unemployment benefits generate $1.60 in economic
activity for every dollar in cost; the refundable tax
credits generate about $1.20 to $1.40 in activity for each
dollar in cost; and the payroll tax reduction generates
about $1.25 for each dollar in cost. In other words, all of
these measures rank high in "bang-for-the-buck"
effectiveness.

In this part of the package, the White House achieved
everything it sought for low- and middle-income families. It
apparently did not compromise on these issues.

The Negatives

But the package also extends President Bush's tax cuts for
households above $250,000. The Tax Policy Center says these
tax cuts average over $100,000 a year for people whose
incomes exceed $1 million a year; the Congressional Budget
Office ranks such an extension last among the tax and
spending options it studied for spurring the weak economy
and creating jobs; and Zandi ranks it near the bottom of his
list of options.

The package's biggest disappointment is a provision that
would shrink the estate tax well below its 2009 level for
the next two years.

President Obama sought to reinstate the already-generous
2009 estate tax rules, under which the estates of 99.75
percent of people who die would be entirely tax free,
according to the Tax Policy Center. Under the 2009 rules,
the first $3.5 million of an estate ($7 million for couples)
would be exempt from the tax, and the maximum tax rate on
the taxable portion of estates would be 45 percent; the
average effective tax rate on taxable estates would be below
20 percent.

But this was not good enough for Senator Kyl, who insisted
on the inclusion of a proposal that he and Senator Blanche
Lincoln have pushed for some time. Their proposal would
exempt the first $5 million of an estate ($10 million for a
couple) from the estate tax and set a maximum tax rate of 35
percent on the taxable portion of large estates. This would
provide an estimated $20 billion in tax reductions over the
next two years exclusively to the top one-quarter of 1
percent of estates. Those estates would receive an average
tax break of about $1 million each - the bigger the estate,
the more lavish the new tax break. Only the top one-seventh
of 1 percent of estates would owe any tax at all, and their
effective tax rate would average about 14 percent, based on
Tax Policy Center estimates.

What Should Policymakers Do?

Despite the provisions concerning the upper-income tax cuts
and the estate tax, which would squander billions of dollars
while doing little to help the economy, policymakers should
approve the package. The unemployment insurance and
refundable tax credit provisions are essential to prevent
large losses of purchasing power that would slow the economy
- and large increases in hardship and poverty. The temporary
payroll tax cut is also important for spurring economic
growth. In all, the package provides $216 billion in
unemployment insurance and low- and middle-income tax
benefits - $120 billion for the payroll tax cut, $56 billion
for unemployment insurance, and $40 billion for the
refundable tax credits. (The high-end and estate tax
provisions appear to total about $100 billion.)

Moreover, congressional defeat of the package would create a
need for new negotiations with the Congress that takes
office in January. That Congress will be more hostile to
unemployment insurance and tax credits for low-income
working families, just as insistent on continuing the Bush
upper-income tax cuts, and aggressive in pushing for even
more egregious estate-tax policies. Many in the new House
majority favor estate tax repeal.

In addition, defeat of the package could lead to a
protracted period during which all of the tax cuts have
expired and federal unemployment benefits have ended,
damaging the economy and even possibly tipping it into a
double-dip recession.

The big concern about the package is that policymakers will
extend again in 2012, and subsequently make permanent, the
high-income and estate-tax provisions, thereby making our
serious long-term fiscal problems considerably worse. This
is a serious threat, and it is the fundamental danger in the
package.

However, there is a potential remedy. In 2012, the economy
should be stronger than it is today. In addition, Congress
likely will have enacted some significant budget cuts, and
the nation likely will be debating the sort of further cuts
that various commissions have recently proposed, including
cuts in Social Security and Medicare benefits for elderly
widows and seriously disabled people with incomes as low as
$20,000. At that point, the President will need to make
clear that he will veto any legislation extending the high-
end tax cuts or the weakening of the estate tax beyond its
2009 parameters, and he should use the bully pulpit to take
this case to the country.

The country will not likely believe that millionaires should
continue to get tax cuts averaging over $100,000 a year and
multi-million-dollar estates should continue to receive $1
million average tax cuts while programs ranging from
education to environmental policies to Medicare and possibly
Social Security are on the cutting block.

# # # #

The Center on Budget and Policy Priorities is a nonprofit,
nonpartisan research organization and policy institute that
conducts research and analysis on a range of government
policies and programs. It is supported primarily by
foundation grants.

[Greenstein is the founder and Executive Director of the
Center on Budget and Policy Priorities.  He is considered an
expert on the federal budget and a range of domestic policy
issues, from anti-poverty programs and various aspects of
tax policy to health reform and Social Security.  He has
written numerous reports, analyses, book chapters, op-ed
pieces, and magazine articles on these issues.

Prior to founding the Center, Greenstein was Administrator
of the Food and Nutrition Service at the U.S. Department of
Agriculture under President Carter, where he directed the
agency that operates the federal food assistance programs,
such as the food stamp and school lunch programs, and helped
design the landmark Food Stamp Act of 1977, generally
regarded as the Carter Administration's principal anti-
poverty achievement.  He was appointed by President Clinton
in 1994 to serve on the Bipartisan Commission on Entitlement
and Tax Reform and headed the federal budget policy
component of the transition team for President Obama.  He is
a graduate of Harvard College and has received honorary
doctorates from Tufts University and Occidental College.] 

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