Yes, at the better end of expectations, but still a small net tax increase as of year end. No actual relief for anyone.

And that’s best case. They haven’t actually passed it yet.

Austerity still going strong in the euro zone and the UK.

And China still working on slowing things down to fight inflation.

Oil prices are up which will slow things down some but not generate enough inflation for the Fed to care.

So doesn’t look like anything out there to move the needle on growth or inflation enough to get the Fed to hike any time soon.


Karim writes:

Definitely at the better end of expectations, for both the tax cuts and the unemployment benefits…

(CNN) — President Barack Obama presented congressional Democratic leaders Monday with a proposed deal with Republicans that would extend Bush-era tax cuts for two years and unemployment benefits for 13 months while also setting the estate tax at 35% for two years on inheritances worth more than $5 million, a senior Democratic source told CNN.

The deal also includes a temporary 2% reduction in the payroll tax to replace Obama’s “making work pay” tax credit from the 2009 economic stimulus package for lower-income Americans, the senior Democratic source said.

As currently crafted, the deal would prohibit amendments by either party, according to the source, who spoke on condition of not being identified by name.

56 Responses

  1. CNBC Reports:
    http://www.cnbc.com/id/40537832

    Some key elements of the Obama/GOP deal include:

    Two-year extension of all Bush tax cuts
    Dividends and payroll tax would remain at 15 percent
    A 13-month extension of unemployment benefits
    A two percentage point cut in the payroll tax for one year.
    A one-year cut in Social Security taxes
    An estate tax at 35 percent with a $5 million exemption, proposed by Republicans.

    Is this Social Security item new? or just part of an extension of Bush era items?…Ill try to find some info…

  2. I’m a fairly recent convert to MMT, but I would think you “old timers” should be damn near giddy over this turn of events. Especially considering the fears of an influx of austerity leaning legislators.

    A partial payroll tax holiday AND continued unemployment spending!

    It’s like someone got the message that monetary policies have done all that they can do, and now the ball is squarely in the fiscal court.

    Of course, it’s probably just trial balloons at this point. But at least they’re being floated.

    1. “damn near giddy”, eh? Maintaining the status quo leaves us where we are right now, which is no great shakes.

      He wants to cut 2 points of the 15.3% payroll tax (this is what the “one year cut in Social Security taxes” refers to). Of course, from that $120 billion kick subtract the estate tax revival ($15 billion) and the expiration of the $60 billion Making Work Pay tax credit. So the fiscal stance has loosened by the equivalent of less than 1 point of the payroll tax. Yay.

      Obama had one shot before losing his House majority next month to tackle the $1 trillion+ output gap asphyxiating the economy. Instead of going for a payroll tax holiday (as John McCain proposed last year and the freakin’ Rivlin-Domenici budget reform group proposed last month), the President decided to play it safe because, apparently, the status quo is working out so great for him now.

      1. I don’t think that a full payroll tax holiday would pass muster with the Dems, since they would view it as threatening SS and Medicare. The present proposal may not make it for this reason. The thinking is that once the payroll tax is reduced, it will never be able to be restored and with it will go the funding for these programs. So this is not yet a done deal. Progressives are up in arms about it already.

      2. That’s really the final straw. Pogo was right, the enemy is us, and our WMD is ignorance.

      3. Sorry Warren, to answer your question about Social Security taxes: Instead of spending $120 billion to extend the stimulus package’s $400 per worker (or $800 per family if there’s a stay at home spouse) tax credit an additional two years, the White House front loaded the $120 billion into just one additional year (2011) by cutting SS FICA rates by two points from the employee side.

        Of course the Making Work Pay tax credit was a good idea (if an order of magnitude too small) except the brainaics at the WH thought it’d have a more stimulative effect if they cut taxes without actually announcing what they were doing (it was executed by simply adjusting payroll withholding tables).

        The problem with trying to outsmart taxpayers with a secret tax cut is its damn lousy politics, nobody and I mean nobody gave the Democrats credit for cutting payroll taxes, because they hadn’t bothered to tell anybody.

      4. Sorry, I see it was Matt Franko had a question about the Social Security tax.

        Tom, you may be right about the payroll tax holiday being a no-go for Democrats because the sharks are circling the SS trust fund. Not sure what other options Congress has to put money into the economy. The plane’s in a flat spin and Boeing neglected to give everyone a Martin-Baker ejection seat.

        It leaves us one choice really. Congress can amend Title 31, Section 5112 to re-denominate the 200 billion pennies in circulation as worth $5 each. Won’t increase the deficit a, err $5 and yet my 6 year old niece’s net worth would grow rather dramatically. :o)
        http://www.law.cornell.edu/uscode/31/usc_sec_31_00005112—-000-.html

      5. The problem is that none of these bozos has an inkling what is actually happening when they do something. It is all ideology and politics on both sides. They are all flailing around in the dark. I had to turn the TV (MSMBC) off tonight it was so bad on the blue side. No idea what Faux Noise was saying on the red side. They are too over the top for me even to sample.

    2. Right, but the scary part is that none of them have the slightest idea of what they are about. These are stabs in the dark for them that just happened to turn out kind of OK. At least they didn’t do any great damage — yet. But there will still be plenty of opportunities for that.

      However, this is not yet a done deal. Many Democrats are balking since it doesn’t address the deficit — Democrats have become the party of fiscal responsibility since the GOP abdicated it — and independent Bernie Sanders is railing against the proposal for this reason. The progressive blogosphere is in a tizzy, too.

      1. Many Democrats are balking since it doesn’t address the deficit — Democrats have become the party of fiscal responsibility since the GOP abdicated it

        Good Lord, what a mess. Tom, have you seen the movie Inception yet? I just saw it, great flick. But it has me thinking its like we’re all trapped in the sick dreamscape of Peter Orszag.

      2. right, their fear remains that they ‘spend all that money they borrowed from china and have nothing to show for it’ etc.
        doesn’t get much worse than that.

  3. Now the Kurgman comes in, advocating significant fiscal tightening.

    A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.

    http://www.nytimes.com/2010/12/06/opinion/06krugman.html?partner=rssnyt&emc=rss

    He does not know what he is talking about, right? On the other hand, something must happen to change course of policy, otherwise we will just be stuck here forever.

  4. You lost me on the $120 bln “kick” from the 2% reduction in payroll taxes. In the fiscal year just concluded payroll tax deposits were $1.7T. A 2% reduction would see to be far larger than $120 bln.

    1. Well to go deep into the weeds– this year the capped (at 106k) SS FICA raises $55 billion a point (an estimated $60 billion next year) and the uncapped Medicare FICA raises $72 billion a point (presumably that’s be $80 billion next year). So total FICA collected this year is about $900 billion . The remainder of the payroll tax deposit is for income tax withholdings (there are separate tax payments for capital income).

      So “payroll tax deposits” = FICA + wage income taxes. But colloquially, “payroll tax” means FICA only. The President’s “payroll tax cut” is off the SS side, which doesn’t make much sense since it inevitably will screw up the long term SS trust fund projections. Since Medicare (but not SS) is supplemented by general revenue anyway, it would have made the bean counters happier (and given us an extra $40 billion in stimulus) to deduct the 2 percentage points from the Medicare side of FICA.

      And yes its entirely too complicated, not counting state income taxes (plus the less common city income tax), there are two separate federal taxes on wages, income tax and FICA (the latter divided by rate and tax base into SS and Medicare).

  5. Sorry, looks like I misplaced my decimal. That 2% reduction in payroll taxes comes out to a LOT less than $120 bln by my calculation. More like $34 bln.

    1. Michael, how are you applying the 2%? A 2% cut on the SS payroll rate of ~15.4% (?) lowers the take by 13%. Assuming the lower rate applies only to SS, not Medicare, 13% of 2009 collections (http://www.ssa.gov/oact/trsum/index.html) would be $105B by my calculations.

      This is starting to look like a garbage compromise overall. But as others have pointed out, it’s tough to do anything constructive when neither side seems to know what the hell they’re talking about.

      1. Thanks Art, that was my mistake. I was applying the cut in the wrong way. A 13% reduction on total employment tax deposits would be $221 bln. Taking only SS is how it sums to $120 bln.

      2. Based on Art’s link here (Thanks!),
        Looks like, for 2009 data of $808B total received for OASI/DI (698. + 109.) portion of “Soc Sec”. Cuts are to employee side only, so 0.5 (employee half) = 404B paid by employees in 2009.

        Now they will not take 2% of the 6.2% (reducing rate to 4.2%) so the ratio of the 4.2/6.2% of the 404B would lower those revenues to 275B, so a cut of $129B based on these 2009 numbers….about a breakeven vs the 120B witholding thing they are deleting.. if I’m right here I guess about a wash as of course others have pointed out….more muddle through. Resp,

  6. Most are skipping over Warren’s conclusion: FICA reduction minus ‘a temporary 2% reduction in the payroll tax to replace Obama’s “making work pay” tax credit from the 2009 economic stimulus package for lower-income Americans’

    those should largely offset? Why NOT be more bold? Back to deficit terror and the flat earth society mentality. Obama should come out and say that a national EEG would show zero mental activity inside the beltway, so “The only thing we have to fear is flat-lined thinking!”

    they just can’t bring themselves to let citizens benefit! any expanded currency supply has to go to banker bonuses or it will be “wasted?”
    As Galbraith says: Who ARE these economic advisors anyway?!!!

    Here’s my advice for Obama’s economic advisors, it’s still “@#$%^&!”
    Not another 2 years!

  7. Yes, it’s really only a 1% reduction, since the “making work pay” cut was about 1%.

    And I agree with how politically dense the Obamaites are. When Bush did a stimulus distribution, he mailed checks with his friggin’ signature on them to every taxpayer. Obama cut taxes, didn’t tell anybody about it, and had Tea party morons demonstrating against his “tax increases”!

    1. Any thoughts on how much responsibility the Clinton admin’s retreads bear? I recall at least one pundit warning in late ’08 or early ’09 that they would be Obama’s downfall.

      Then again, even Howard Dean thinks that the federal budget must be balanced, so widespread errors re the meaning and function of federal deficits probably deserve far more blame than Clintonistas and their damned magical “surpluses”.

    2. Obama cut taxes? I don’t remember any taxes he cut. There were some tax expenditures certainly, or other giveaways to favored constituencies, but when did he actually cut rates so that work incentives would change?

    3. “make work pay” was worse designed than this payroll tax holiday. This goes directly to recapitalized household. Make Work Pay did not. This is improvement

  8. In other news, I just found out that our family’s health insurance premiums will be increasing by 50% over 2010 (and 60% on top of that as our recent college grad can’t find work), which will more than eat up any bump in our net income from the uber-wimpy payroll tax break. There are no apparent plans for the health insurer’s premium increase to “sunset” at the end of next year. Would be funny if it weren’t so damned painful.

    1. That 60% should be 36%. Still a 200%+ increase over this year. So much for our ‘stimulus’. Maybe we can start mowing some health insurance execs’ lawns.

      1. I don’t want to carry the insurance companies’ water for them, but if you look at aggregate profits and executive compensation at health insurers, the numbers are towards the bottom of the scale in the business world. There’s a Caroline Baum article on that from last year that I could probably dig up.

        That tells me that either only stupid, lazy people go into the health insurance business or (more likely) the problem isn’t that lack of competition is allowing insurers to gouge captive, desperate consumers.

        So don’t blame the insurance companies. Blame the government (state and federal) for not allowing you to choose a scaled-down insurance plan that better fits your needs.

      2. ESM: “Blame the government (state and federal) for not allowing you to choose a scaled-down insurance plan that better fits your needs.”

        No worries, I do. Maybe I’ll start tending to my Senators’ rose bushes as well.

        Art Laffer actually proposed an interesting idea when the HC debate first started: federal govt sponsored major medical (high deductible, catastrophic coverage) available to all.

      3. Yes, that’s a good idea, which I think is part of Warren’s plan for health care insurance. Warren also wants a fixed dollar annual grant to each person, partially refundable to the Treasury at the end of the year (to encourage people to spend on a minimum amount of health care) and partially not (to encourage people to be frugal).

        The key is to make people cost-conscious about their non-catastrophic expenditures. You do that, and 1/3 of health care costs magically disappear (disclaimer — I pulled that number out of my posterior, but it’s probably ballpark correct).

  9. Ben Bernanke confuses others/mainstream – he says the near opposite in his two “60 minutes” appearances

    http://www.cbsnews.com/stories/2009/03/12/60minutes/main4862191_page2.shtml

    “…It’s much more akin to printing money than it is to borrowing.”

    “”You’ve been printing money?” Pelley asked.

    “Well, effectively,” Bernanke said. ”

    http://www.cbsnews.com/stories/2010/12/03/60minutes/main7114229_page2.shtml?tag=contentMain;contentBody

    “One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we’re doing is lowing interest rates by buying Treasury securities. “

    1. Looks to me like he was briefed by one of the technicians at the Fed, but the lesson never really sunk in. Pretty pathetic – this stuff is not that hard, you’d think a bright guy like Bernanke would get it eventually…

    2. Actually, it looks to me that Bernanke was correct on both occasions. Back in 2008 and early 2009, the Fed was buying private sector assets that were not government IOUs (i.e. not financial wealth). So the Fed was exchanging government IOUs for more tangible things, like equity in AIG, which means that net financial wealth in the private sector increased.

      Today, the Fed is simply exchanging one type of government IOU for another. It has no effect on net financial wealth, so the Fed isn’t really printing money. Generally, only the Treasury prints money. The Fed just fiddles with interest rates and the duration of various forms of government IOUs.

      1. that never stops people from quoting out of context;

        reminder: data is meaningless without context (quotes too 🙂 )

      2. Do you really think that Bernanke was admitting to increasing NFA, a fiscal operation supposedly the sole prerogative of Congress?

      3. Of course. Everybody in Congress thinks the Fed prints money and the Treasury can’t, so what does he have to worry about?

      4. Yeah, I forgot for a moment that these guys are bozos.

        The same comment at 5:13 above is out of place. Forget it.

      5. ESM,

        Doesn’t matter – then or now. Earlier the private sector’s assets increased but liabilities (to the Fed) too.

        Lets see: Fed lends $100

        Fed Assets+ = $100 (Alphabetic soup of advances to the private sector)

        Fed Liabilities+ = $100 (Reserves)

        Private Sector Assets+ = $100 (Reserves)
        Private Sector Liabilities+ = $100 (Due to the Federal Reserve)

        The way the non-government sector gains NFA (whatever your definition is) by are income flows.

        I think you neglected “Due to the Federal Reserve”

        Contrast this to the case where the government spends on building a highway. The private sector’s indebtedness to the government doesn’t increase.

        At any rate, printing money should exclusively be reserved for the case when its print at presses and that demand-led and I like Ben Bernanke’s stand now – the second link.

      6. Depends on your definition of financial asset. Equity is not a financial asset in my opinion. Since it represents part ownership in a business, I consider it to be tangible, like a house. It is nobody’s liability. I have had this argument with some people here before, and I still believe I’m right.

        I agree though that if the Fed is buying true financial assets (i.e. assets which are somebody else’s liability), then it is not increasing NFA. However, exchanging good government IOUs for crappy, very risk private sector IOUs does increase the “good equity” in the system and help to stabilize the private sector’s balance sheet. What the Fed is doing now has no effect in that respect.

      7. I’m not saying you’re wrong, but from an accounting point of view equity is a liability of the firm, and is entitled to a share of the dollar profits generated by that firm.

      8. Yes, well sometimes accounting conventions are very helpful, and sometimes accounting conventions are silly and counterproductive.

        If I build a house, and the government buys that house, the government has printed money, correct? Net financial assets have increased, correct?

        What if I build a house, create a company and then contribute the house to the company as capital (in exchange for 100% of the shares of stock in that company)? Now I sell my shares in the company to the government. Has anything changed?

      9. Really opposed to the usage of “printing money”.

        If the government buys the house from you, it transfer funds from its account at the central bank to your account. No money is printed.

        Let us say that it asks the central bank for cash to pay for the house. The central bank debits the government’s account and hands over the cash. The government pays you and you deposit the currency at the bank. The bank hands it to the central bank in exchange for reserves (or the bank keeps it and demands less currency the next time).

        “Printing money” gives a terrible behavioural picture of whats going on.

        The government won’t buy equities of your firm.

        Amazing how not treating equities as “not liabilities” can lead to all kinds of misaccounting. The Economic Report of the President (US) counts equities held by foreigners as not liabikities.

      10. “Really opposed to the usage of “printing money”.”

        I imagine that’s because the phrase is misused. I generally use it in the sense of net creating government liabilities/IOUs. In this example, I am saying something stronger. The government is actually creating NFA.

        “If the government buys the house from you, it transfer funds from its account at the central bank to your account. No money is printed.”

        Government IOUs were created and given to me, i.e. the private sector. Remember, the government does not hold government IOUs. Any government IOUs that the government acquires should be considered canceled or extinguished. This is the cleanest example of printing money that I can think of.

        “The government won’t buy equities of your firm.”

        Is that an argument? If I was married to Maxine Waters (shudder), the government might have.

        “Amazing how not [sic?] treating equities as “not liabilities” can lead to all kinds of misaccounting.”

        Equity is ownership, not a promise to be paid something. Even from an accounting perspective, it’s crazy to consider equities a liability. If the price of an equity is bid up, does that mean the liability has increased? That’s nutty.

      11. ESM,

        Management is rarely in the position to decide to cut dividends by say half. They are always indebted.

        If the price of equity is bid up, yes liabilities go up – because if the firm wants to buy back shares, it has to pay higher.

        Similar is the case with equities held by foreigners. A nation as a whole, is liable to foreigners in equities because a foreigner can purchase a stock, wait for appreciation and buy a corporate bond later. Isn’t it more smooth to assume that equities are like liabilities ?

        Imagine working in a startup and funded by venture capitalists – you have no liabilities in the sense that if the startup fails, do not lose anything. However, imagine the pressure put on you by the VCs.

    1. Heh – who knew there had been 2 hyperinflations in the U.S. over the last 100 years? The things you learn on the internet…

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