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Busch: Bush Tax Cuts: Party Like it's 2001-2003

Last night, President Barack Obama announced the following potential dealwith Republicans and released this information:

  • Extending the Bush Income-Tax Rates for Two Years. The potential deal includes a mutually agreed upon solution to the impasse over taxes by extending the Bush income tax rates for two years and reforming the AMT to ensure that an additional 21 million households will not be hit with a tax increase. These measures will provide relief to more than 100 million middle-class families and prevent a tax increase of over $2,000 for the typical family.
  • Additional Provisions Designed to Promote Vigorous Economic Growth. In addition to the Bush rates, the Administration secured several provisions that are vital for our economy’s growth, which would not have been possible without this potential deal: $56 billion in unemployment insurance, an about$120 billion payroll tax cut for working families, about $40 billion in tax cuts for our hardest hit families and students; and 100% expensing for businesses next year.
  • Working families will not see their taxes go up. A typical working family faced a tax increase of over $3,000 on January 1st. That’s avoided under this potential agreement, and working families won’t see their total taxes go up next year.
  • Focused on high impact job creation measures. The potential agreement includes some of the best measures for jumpstarting growth and job creation, including a full year of emergency unemployment insurance benefits, a $120 billion payroll tax cut for working families and a continuation of tax credits for working families. This is on top of growth generated by extension of the middle-class income tax rates.
  • Does not worsen the medium- and long-term deficit. These are responsible, temporary measures to support our economy that will not add costs by the middle of the decade. The President does not believe it is affordable to make the high-income tax cuts permanent and will continue to have that debate in the years ahead.

Unlike what the President stated, the early scoring on the proposal is about $900 billion over the next two years according to the NYTand I’m not sure how that will not increase the budget deficit.

The question remains: is this stimulative?

While it’s always great to cut taxes and allow individuals to decide what to do with their earnings, the size of the additional measures is small. The cut in the payroll tax will be spread out over the entire year and amounts to $10 billion a month in potential new spending.

The extension of the jobless benefits will assist out-of-work voters; it also inflates the unemployment rate (Harvard’s Barroso) and potentially creates a European-like social safety net.

Therefore, the best that can be said about this potential compromise is that the US avoided disaster by averting a massive tax hike during a weak economic recovery. The worst that can be said is that it kicked the fiscal deficit issue down the road to 2012 and didn’t address the overall size and growth of the US government. Like the European debt crisis, these issues will circulate back at a most inopportune time in the future.

For now for the markets, party like it's 2001-2003.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.