Phew! It’s Done. Now What?

    As expected Congress finally passed the much debated bill that extended the tax breaks for another two years, extended unemployment benefits for another 13 months and added some additional tax breaks and considerations for business. The deal cut between President Obama and Senate Republicans some weeks ago was pretty much a done deal but there was an opportunity for the opponents to register their displeasure before the deal went down. Now that the politicians have finished with this the focus now shifts to what this really means for the growth of the economy in 2011 and beyond.
     An assessment of this law will preoccupy analysts and voters for the next few years as there will be two issues to consider. The first is whether the extension of breaks and benefits will really do much for the economy. Even if the answer to this question is positive, there will be a second set of concerns over whether the $1 trillion effort is worth it given what this will do to make the deficit that much worse. Those who fought the measure were pretty diverse in terms of their opposition  and most of the debate was less about really defeating the bill and more about staking out some future political positions. The economic critique was a little more pointed.

Analysis: There was no significant economic objection to the notion that this law would benefit the economy in the short term. How could it not? If the tax breaks had not been extended, the average tax payer would have been out between $1,500 and $3,000 dollars next year and that is not an inconsequential sum of money. A loss of unemployment benefits would have stripped some two million people of their assistance and that is cash no longer in private hands. Granted, the money would not have simply vanished and it would have been spent by the government in some way but when the economy is still faltering it is usually a better idea to get the private sector moving.
    The economists made their case on the basis of what is better in the long run and there were two schools of thought. To those who put deficit control at the top of the list, the whole notion of offering tax breaks and extending unemployment to a record number of months is folly and just puts off the inevitable day of reckoning. The assertion is that contending with the deficit is never going to be pleasant or popular and putting it off just ensures that it will be a bigger problem later.
     The other position is that dangling these tax cuts as political fuel every couple of years creates chaos in the business community. The executive and the strategist need to know what to expect in the years to come and it matters what the tax bill will be. The same is true for the individual. It serves little purpose to bring an issue this important back every couple of years. If the tax cut is a good idea it should be made permanent and it is isn’t, it should have been allowed to expire. - Courtesy Kentucky Society of CPA's.