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The potential impact of the tax cut extension

Marketplace Staff Dec 8, 2010

The potential impact of the tax cut extension

Marketplace Staff Dec 8, 2010


Kai Ryssdal: So here’s a thought. What if instead of calling it a tax cut deal, we call the agreement between congressional leaders and the White House the other day “a stimulus plan,” a way to get the economy going again. Economists are already crunching the numbers and the consensus seems to be that if it’s eventually passed, the thing won’t be bad for the economy, at least in the short run. The question is how much good it can really do.

Marketplace’s Nancy Marshall Genzer reports from Washington.

Nancy Marshall Genzer: The tax deal has economists raising their forecasts for economic growth. Economists at Moody’s Analytics are bullish. They’ve raised their growth projections for next year from 2.8 percent to 4 percent.

Moody’s economist Gus Faucher says the tax plan is a kind of stealth stimulus package.

Gus Faucher: It’s putting more money in consumers’ hands through tax cuts and expanded unemployment insurance benefits, so it really is a stimulus package, even if nobody wants to say that.

Faucher says the tax deal extends jobless benefits and cuts Social Security taxes. People living paycheck to paycheck will have more money to spend — and they tend to spend all they have.

Stuart Hoffman is chief economist at PNC Bank. He’s not so bullish, because the tax package is mainly an extension of existing tax rates.

Stuart Hoffman: It’s not that stimulative to just maintain things as they were.

There’s another reason the tax deal might not be a huge stimulus, according to Howard Gleckman of the Tax Policy Center. He says the biggest tax cuts go to the rich, who don’t go right out and spend the money.

Howard Gleckman: There’s only so much that you can spend. People at the very high ends generally don’t change their consumption based on a tax cut.

The very rich might put the extra cash in the stock market or buy a new house. Moody’s economist Faucher says those are investments with no immediate benefits. He’s counting on the rest of us to snap up new cars or appliances. I’m thinking about a new toaster.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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