The White House and Republicans have reached an agreement on the Bush tax cuts, and it's a whopper. Republicans get their tax cuts. Democrats get their second stimulus -- albeit, much of it in the form of another tax cut.
Here's a six-point outline of the compromise, via Jake Tapper, much of it confirmed by the president in a Monday speech:
1. The entire Bush tax cut law is extended for two years.
2. A one-year, two-percentage point reduction in the payroll tax replaces the Making Work Pay tax credit from the Recovery Act. This $100+ billion stimulus will leave more money in the pockets of
both employers and employees, since the payroll tax is divided evenly between boss and worker. [*Treasury emails to update: The tax cut is two percentage points on the employee side only. That brings payroll taxes down to 4.2 percent, from 6.2 percent, on wages up to about $107,000 -- a significant tax break that especially benefits middle- and upper-middle class workers.]
3. A de-clawed estate tax reemerges in 2011, after a one-year hiatus. In 2010, estates larger than $5 million will fork over up 35 percent of dollars above that ceiling. Without congressional action, the estate tax would be restored for estates worth more than $1 million with rates rising to 55 percent.
4. Businesses will be able to deduct 100% of certain investments in 2011 to juice capital investment.
5. Congress will consider extending the American Opportunity Tax Credit (college tuition), Child Tax Credit and Earned Income Tax Credit -- another $40 billion in tax cuts that will primarily help low income families. [This has been rumored but not confirmed.]
6. Unemployment benefits get a 13-month extension.
Let's think about what this means from both a short-term stimulus perspective and a long-term deficit perspective. In the near future, this means significant help for American families and businesses that seemed out of reach just a few days ago. Unemployment benefits are considered the most effective form of stimulus. The payroll tax holiday will double the relief from the Making Work Pay tax credit, giving average worker thousands -- yes, thousands -- of dollars in additional after-tax income. The extensions to the refundable portions of the Child Tax Credit and EITC will also target low income families hit hardest in the downturn.
In short, a $60 billion tax cut for the richest will be unsavory to some people, but it's become a vehicle for historic tax relief for average Americans. Of the six stimulus ideas analyzed by the CBO in the summer, this deal has four, including the two most stimulative: jobless benefits and a payroll tax cut, both of which target the middle- and low-income Americans.
From a long-term perspective, however, this deal is a potential budget-buster. There is no official cost estimate, but it will certainly add hundreds of billions of dollars to the 2011 deficit. This makes the case for deficit reduction all the more necessary in the next few years.
Today, Americans at every income level got a major stimulus. But tomorrow's deficit debate just got louder and more urgent.