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CBO Says the Middle Class Tax Relief and Job Creation Act Would Decrease the Deficit

1 min readBy: David S. Logan

On January 6th, the Congressional Budget Office scored the Middle Class TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Relief and Job Creation Act of 2011 (H.R. 3630), adjusting for the enactment of the two-month payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. holiday.

In contrast with its previous scoring of the bill—which estimated a $25 billion increase to the deficit—the new analysis shows a deficit reduction of $5 billion. However, much of the change in score is due to the enactment of H.R. 3765, the Temporary Payroll Tax Cut Continuation Act (TPTCCA) of 2011.

A major part of TPTCCA is the provision increasing fees for Fannie Mae and Freddie Mac. This amounted to a ten year spending decrease totaling $36 billion. Since enacting the Middle Class Tax Relief and Job Creation Act would no longer have any effect on this line item, these savings were taken out of the new CBO score.

Offsetting this lost spending decrease are other large spending reductions due to the proposed changes in policies such as unemployment compensation, Medicare physician payments, and other health provisions.

In addition, because the Middle Class Tax Relief and Job Creation Act would only have a marginal effect of a 10-month extension of the payroll tax holiday, it would cost $100 billion rather than the $120 billion as previously scored.

Though tax holidays are poor policy in general—primarily because of the adverse effects they have on individuals and businesses by introducing extra uncertainty into the economic environment—at least this legislation would decrease the deficit. Though the effect would be marginal, it would help reduce the adverse effects created by the ludicrous two-month extension agreed upon in December.

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