December 17, 2010

Tax Foundation Experts Comment on Passage of Obama Tax Package

Washington, DC, December 17, 2010—Late last night the House of Representatives voted 277-148 to approve the compromise package of tax provisions which were passed by the Senate 81-19 earlier in the week. The following are statements by Tax Foundation economists and analysts in response to the passage of these provisions.

The Impact of Passage on the Future of Tax Policy
Scott A. Hodge
President, Tax Foundation

The passage of the compromise tax plan hardly warrants champagne and balloons. To be sure, taxpayers were spared a massive tax increase, but all that lawmakers have done is effectively locked in the status quo for another two years. Except for the temporary two percent payroll tax cut, taxpayers will wake up on January 1st no better off than they are today. Indeed, the tax code will remain as complicated and Byzantine as it has ever been.

The worst aspect of the deal is that it guarantees that taxes will continue to be a political football for the next two years. Starting a year from now, when the temporary payroll tax cut expires, we’ll have another debate over preventing a “tax hike” on working families. This will be followed by the 2012 debate over extending the Obama tax compromise plan.

The best outcome of this compromise deal is that it spurs an honest debate over fundamental tax reform. I hope President Obama is sincere in his recent comments about overhauling the tax code. As Ronald Reagan showed in 1986, substantive tax reform is impossible without presidential leadership.

The Impact of the Payroll Tax Cut on the Economy
Mark Robyn
Staff Economist, Tax Foundation

The tax deal struck in Washington is largely a continuation of the status quo. One of the few new provisions is the payroll tax holiday. The deal will reduce the employee portion of payroll taxes from 6.2% to 4.2% of wages for 2011, which amounts to a not-insubstantial $1500 tax cut for a couple with $75,000 in wages. The tax reduction would be spread over the year by reducing the amount of tax that is withheld from workers’ paychecks, and the hope is that the extra cash in workers’ pockets will stimulate consumer spending and boost the economy.

The cost of the holiday would be about $112 billion, but the effects of this plan are hard to determine. If consumers spend all or much of the extra cash it would definitely be a boost to the economy, but we don’t really know if taxpayers will actually spend the extra money. The Congressional Budget Office and many economists are optimistic about the stimulative effects of such a policy, but there is some uncertainty.

Since the tax cut is temporary, and because many consumption decisions are based on long-term income expectations, workers may save the windfall rather than spend it. If workers save or use the money to pay down personal debt, the tax cut will have less positive impact on the economy in the short term. And for the policy to be considered successful, the near-term macroeconomic benefits must outweigh the long-term costs. The government will borrow the $112 billion to fill the hole in the Social Security Trust Fund, but this borrowing will have to be paid for with tax increases or spending cuts in the future, when Social Security is already going to be under increased pressure from an aging workforce.

The Impact of Passage on Low-Income Workers
Nick Kasprak
Programmer and Analyst, Tax Foundation

After analyzing the competing tax proposals offered by both parties, it becomes clear that the Obama compromise bill produces a much lower tax bill (or a higher tax refund) for low-income workers. Despite not being quite as generous as current 2010 tax law in very low-income cases – below $40,000 for married filers and $20,000 for single filers – it remains a better deal than either the GOP or the Democratic bills previously proposed.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.