A Favorable Tax Deal
Written by Jeff Thredgold, President, Thredgold Economic Associates
December 7, 2010
…a liberal Democratic President striking a deal with conservative Republicans…while other liberal Democrats are fuming!
Monday’s announcement of an agreement between the Obama Administration and the Republican Congressional leadership was a positive development. Both sides gained at the bargaining table, while both sides also gave on issues they find distasteful.
Meanwhile, about-to-be-outgoing Speaker of the House Nancy Pelosi is angry with the President for selling out. She and other members of the Democratic elite are suggesting that their support of such a broad agreement should not be taken for granted.
The Republicans get what they wanted…an extension of the 2001 and 2003 tax cuts for ALL taxpayers for two years, as well as relief from the Alternative Minimum Tax (AMT). The Republicans also get clarity on the estate tax, with a 35% tax rate on estates larger than $5 million for an individual and $10 million for a couple. More aggressive write-offs for business investments made during 2011 were also included.
The President gets what he wanted…a 13-month extension of unemployment benefits for millions of longer-term unemployed people; a nearly one-third reduction in the Social Security withholding rate for workers (from 6.2% to 4.2% on incomes up to $106,800); and an extension of the earned income tax credit.
…the political game of give and take…of actual cooperation between political parties…working for a change
Political reality suggested the need for compromise. Failure to reach any type of tax agreement would have seen tax rates for all income earners move higher on January 1, now less than four weeks away. This is exactly what a fragile economic recovery didn’t need.
In addition, the President was painfully aware that early January finds the Republicans taking control of the House of Representatives. The GOP would have immediately passed an extension of the Bush tax cuts for all taxpayers, perhaps trying to make it permanent.
The Senate, still under a slight Democratic majority, might have actually gone along with a tax cut extension, although not likely making it permanent. Note: 23 Democratic Senators are up for re-election in 2012, while only nine Republicans face the voters. The Democrats clearly saw in early November what following the strict Democratic line did for many other Democratic House and Senate members.
With likely Congressional approval of extending the tax cuts for ALL income earners, the President would have then had to make a choice. Veto the bill or sign it.
What It All Means
In my view, three powerful and positive developments have occurred in recent weeks. The first was success by voters in early November of derailing the ever-expanding nature of government fueled by the Administration and the Democratic leadership in the Congress.
The second was the relative success of the Obama deficit reduction commission in gaining traction in our longer-term need to control the growth rate of government spending. Yes, the commission only had 11 of the required 14 votes to send the package to the Congress. However, a critical dialogue has begun.
The statement by former Clinton White House chief of staff Erskine Bowles, one of the commission co-chairs, that “the era of deficit denial in Washington is over” will (hopefully) resonate for weeks and months to come as politicians (hopefully) get serious about the need to control the growth rate of government spending…and place this country on a more fiscally stable path…
The final development is the tax agreement noted above. The ability of political parties to come together for the good of the nation…above their individual pursuits… is essential to dealing with major issues.
The U.S. Economy?
The elimination of uncertainty for potential job creators is vital. Potential job creators will soon have more certainty as to what will unfold regarding taxation. Potential job creators will (hopefully) soon have rising expectations that the U.S. economic disease tied to $1,000,000,000,000 or greater annual budget deficits for as far as the eye can see will be treated.
It is likely that most forecasting economists will upgrade their growth expectations for the U.S. economy for 2011 and 2012. Job and income gains should be stronger. The sluggish economic rebound could pick up speed…
A Lousy Jobs Report
The disappointing November employment report was a departure from a string of stronger-than-expected economic reports of the prior week or two. Here’s hoping the new agreement to extend the 2001 and 2003 tax cuts for ALL taxpayers will lead to stronger job gains in coming months.
The U.S. gained a modest 39,000 net new jobs during November, much less than the 150,000 rise expected. Partially offsetting this soft gain was an upward revision of 38,000 jobs to gains of the two prior months.
More ominous was the rise to 9.8% in the nation’s unemployment rate, following three consecutive months at 9.6%. The unemployment rate has now been at 9.5% or higher for 16 consecutive months, the longest string of pain since the Great Depression.
We have suggested regularly during the past year that the rate could move temporarily higher—despite stronger U.S. economic performance—as hundreds of thousands of discouraged workers who had previously left the labor force re-entered in search of a job. Unless and until they find such a job, they are now counted as unemployed.
Private-sector businesses added 50,000 net new jobs in November, the eleventh month in a row of gains. Still, the 50,000 gain was roughly one-third of expectations.
The nation’s goods producing sector lost 15,000 jobs in November, with an estimated 13,000 loss of manufacturing jobs and 5,000 lost jobs in construction. Mining and logging added 3,000 jobs.
The nation’s service providing sector added 65,000 jobs in November, led by the addition of 53,000 jobs in professional and business services (mostly “temp” jobs) and 30,000 additional jobs in education & health services. Leisure & hospitality added 11,000 jobs, while government (primarily state and local) lost an identical number.
Of modest suspicion was the announced “loss” of 28,000 retail jobs during the month. A flawed seasonal adjustment may be at fault. Nevertheless, except for 2008, when the economy was in the process of falling of a cliff, there hasn’t been such a weak November for retail payrolls in 29 years (cnnMoney.com).
A weak jobs report. But, an improving environment for job gains in coming months, tied to political cooperation…
…a step in the right direction