NY Times: Analysts Say Economic Recovery Might Suffer if Tax Break Is Allowed to Expire

Wanted to be sure you saw this NY Times article on the consequences of Republicans walking away from a bipartisan bill to extend middle class tax cuts. By refusing to compromise, House Republicans are putting economic growth and jobs at risk. It’s time for GOP leadership to drop their opposition and work with Democrats to avoid a tax hike on middle class families.

Key excerpts:

“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.”

“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?’”

“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.”

“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.”
 

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