WASHINGTON — Economists are warning that the looming expiration of a temporary payroll tax cut — and the possibility that Congress will not extend it — would cause families to spend less and could sap strength from a fragile recovery.
On Friday night, the Senate reached a tentative agreement to extend the payroll tax cut for two months. However, House members have opposed a short-term deal, leaving it in limbo heading into the weekend.
The tax cut, part of a late 2010 deal between the White House and Congress, will save the average American household $934 in 2011, according to the Tax Policy Center in Washington.
Although the precise impact of the cut this year is impossible to know, analysts generally say it lifted spending and helped the economy cope with Europe’s troubles as well as rising food and gasoline prices early this year.
If the cut expires early next year, forecasters predict that economic growth and hiring will slow, and some say the economy could even be pushed back into recession. The expiration would effectively amount to a 2 percent tax increase on all of America’s 160 million wage earners.
“If the Europe mess weren’t there, there would be a good case for letting taxes go back up,” said Joel Prakken, the chairman of Macroeconomic Advisers, a major forecasting firm. “But a combination of a big tax increase plus the threat from Europe, when the economy is still in the doldrums — why take that risk?”
Gregory Daco, an economist at IHS Global Insight, another widely followed research firm, said policy makers were mistaken to assume that the recent improvement in the economy would automatically continue. “Policy makers are shortsighted,” Mr. Daco added.
Goldman Sachs estimated that the expiration could knock two-thirds of a percentage point off growth in early 2012 if the tax cut was not extended for a full year.
More pessimistic analysts at the French bank Société Générale warned clients that failing to renew the tax cut and continue federal support for the long-term unemployed might erase growth entirely in the first half of next year.
The White House has started to seize on independent economists’ views to make the case for extending the tax cut, which the administration pushed to include in the deal with Congress last December.
Republicans have given mixed signals on an extension, with some opposing it as an expensive Band-Aid and others supporting it if it is part of a bill that also approves the Keystone XL oil pipeline from Canada to the Gulf Coast.
On Wednesday, a senior administration official cautioned that the economy “cannot withstand” the hit. If taxes go up, “You have a material, significant blow to growth at a time when the economy is not growing fast enough,” a second senior administration official said.
“And you have this other damage in confidence, and confidence can have bigger effects on how much people spend, or how much businesses hire, how much businesses invest.”
Economists have noted that dollar for dollar, the payroll tax cut does not jolt growth as well as other provisions, like providing additional weeks of unemployment insurance for workers out of a job for more than six months.
In a November report, for instance, the nonpartisan Congressional Budget Office found that a cut to payroll taxes paid by employers, rather than employees, might have a stronger impact on growth and jobs.
Some economists have even argued that most Americans save much of it one way or another.
“About half say they’re going to pay off debt, about a third say they’re going to save it, and the rest say they will spend it,” said Joel Slemrod, an economist at the University of Michigan, who has surveyed households’ awareness of and responses to the tax cut for a forthcoming paper.
“We have some evidence suggesting that these responses are correlated with what people actually do.”
Still, economists believe the tax cut helped buoy the economy during a difficult year characterized by slow growth and meager job gains.
Moody’s Analytics, for instance, estimated that the payroll tax cut, combined with an expansion of jobless benefits for the long-term unemployed and a few other measures, added a percentage point to growth in 2011.
Moreover, forecasters believe that next year’s payroll tax cut might have a stronger impact than last year’s. Mr. Prakken, of Macroeconomic Advisers, said that with the cost of gasoline potentially more stable, households might spend the cash on consumer goods and ignite a stronger recovery.
“Last year, everybody said the $120 billion payroll tax holiday would spur growth, but then growth did not pick up,” he said. The tax cut “had exactly the stimulative effect we thought it would. But that effect was almost exactly offset by an unexpected peaking of energy costs.”
nytimes.com
On Friday night, the Senate reached a tentative agreement to extend the payroll tax cut for two months. However, House members have opposed a short-term deal, leaving it in limbo heading into the weekend.
The tax cut, part of a late 2010 deal between the White House and Congress, will save the average American household $934 in 2011, according to the Tax Policy Center in Washington.
Although the precise impact of the cut this year is impossible to know, analysts generally say it lifted spending and helped the economy cope with Europe’s troubles as well as rising food and gasoline prices early this year.
If the cut expires early next year, forecasters predict that economic growth and hiring will slow, and some say the economy could even be pushed back into recession. The expiration would effectively amount to a 2 percent tax increase on all of America’s 160 million wage earners.
“If the Europe mess weren’t there, there would be a good case for letting taxes go back up,” said Joel Prakken, the chairman of Macroeconomic Advisers, a major forecasting firm. “But a combination of a big tax increase plus the threat from Europe, when the economy is still in the doldrums — why take that risk?”
Gregory Daco, an economist at IHS Global Insight, another widely followed research firm, said policy makers were mistaken to assume that the recent improvement in the economy would automatically continue. “Policy makers are shortsighted,” Mr. Daco added.
Goldman Sachs estimated that the expiration could knock two-thirds of a percentage point off growth in early 2012 if the tax cut was not extended for a full year.
More pessimistic analysts at the French bank Société Générale warned clients that failing to renew the tax cut and continue federal support for the long-term unemployed might erase growth entirely in the first half of next year.
The White House has started to seize on independent economists’ views to make the case for extending the tax cut, which the administration pushed to include in the deal with Congress last December.
Republicans have given mixed signals on an extension, with some opposing it as an expensive Band-Aid and others supporting it if it is part of a bill that also approves the Keystone XL oil pipeline from Canada to the Gulf Coast.
On Wednesday, a senior administration official cautioned that the economy “cannot withstand” the hit. If taxes go up, “You have a material, significant blow to growth at a time when the economy is not growing fast enough,” a second senior administration official said.
“And you have this other damage in confidence, and confidence can have bigger effects on how much people spend, or how much businesses hire, how much businesses invest.”
Economists have noted that dollar for dollar, the payroll tax cut does not jolt growth as well as other provisions, like providing additional weeks of unemployment insurance for workers out of a job for more than six months.
In a November report, for instance, the nonpartisan Congressional Budget Office found that a cut to payroll taxes paid by employers, rather than employees, might have a stronger impact on growth and jobs.
Some economists have even argued that most Americans save much of it one way or another.
“About half say they’re going to pay off debt, about a third say they’re going to save it, and the rest say they will spend it,” said Joel Slemrod, an economist at the University of Michigan, who has surveyed households’ awareness of and responses to the tax cut for a forthcoming paper.
“We have some evidence suggesting that these responses are correlated with what people actually do.”
Still, economists believe the tax cut helped buoy the economy during a difficult year characterized by slow growth and meager job gains.
Moody’s Analytics, for instance, estimated that the payroll tax cut, combined with an expansion of jobless benefits for the long-term unemployed and a few other measures, added a percentage point to growth in 2011.
Moreover, forecasters believe that next year’s payroll tax cut might have a stronger impact than last year’s. Mr. Prakken, of Macroeconomic Advisers, said that with the cost of gasoline potentially more stable, households might spend the cash on consumer goods and ignite a stronger recovery.
“Last year, everybody said the $120 billion payroll tax holiday would spur growth, but then growth did not pick up,” he said. The tax cut “had exactly the stimulative effect we thought it would. But that effect was almost exactly offset by an unexpected peaking of energy costs.”
nytimes.com
No comments:
Post a Comment