Taxes, Economic Growth, and the Outlook for 2011

Taxes are in the news again this week.  Articles abound and the media is filled with story after story on whether or not the proposed changes in tax policies being debated will take place and will they stimulate economic growth.  The extension of the Bush tax cuts, income tax rates, estate taxes, a payroll tax holiday, even an extension of unemployment benefits – they are all being discussed in detail.  What’s the potential impact?  How will these policies affect economic growth?  What’s the outlook for 2011?  Let’s talk more about these important economic topics right now …

First, let’s outline the tax discussion.  From the news, we learn that the Bush tax cuts (set to expire at the end of December) will likely be extended for two years.  In addition, a one-year 2% payroll tax holiday is proposed.  The money will be taken from funds that would normally go to Social Security.  For businesses, there is discussion of allowing businesses to expense (write-off) investments 100% in 2011 (retroactive to September 2010).  Offsetting, these more positive proposals are some other policies that will adversely impact the economy.  These are the re-instatement of a death tax for estates exceeding $5 M (at a 35% rate) and the further extension of unemployment benefits for another 13 months.

What are the impacts of these proposed economic policies, especially as they apply to the potential for economic growth, and the outlook for 2011?  First, the extension of the Bush tax cuts for two years is helpful.  However, it represents simply maintaining the status quo.  It is not an economic growth policy.  Rather, it’s the avoidance of a nearly $1 Trillion tax increase – a job-killing tax increase.  Not only are these tax cut extensions important, but furthermore, additional marginal personal and corporate income tax cuts are needed to help create a major stimulus to the economy.

Second, tax holidays and short term tax rebates do not have a good track record.  In many cases, people spend in the short-term, based on their long-term expectations.  Most people will think a 2% payroll tax break is good.  But, don’t expect a long term boost to the economy.  People are smart and know that the 2% is coming back very quickly.

The same thing happens will businesses.  They will appreciate the short term tax break permitting the expensing of investments in 2011.  But, don’t expect it to impact their real long term planning.

Finally, extending unemployment benefits for 13 more months might seem like a compassionate thing to do.  However, economically, we know such extensions tend to increase the average length of unemployment.

What’s the outlook for 2011 based on these policies?  Answer – continued slow growth and slow job creation.  Plus, with continued qualitative easing by the Fed, so-called QE2, we can expect significant inflation.  Taken together, don’t look for robust GDP growth in 2011.

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.

Bookmark and Share
This entry was posted in Economic Growth, Economy, Job Creation, Jobs, News, Taxes. Bookmark the permalink. Comments are closed, but you can leave a trackback: Trackback URL.