Wednesday, December 8, 2010

Tax Deal Changes the 2011 Outlook

I am surprised at the size of the tax deal, particulary the 2% payroll tax holiday for 2011.  Combined with the accelerated depreciation component, that is over $200 billion in unanticipated stimulus for 2011 (most of the other components of the deal were anticipated or relatively small).  That's a big deal.

In October, we significantly revised down our forecast for 2011 and 2012, in large part due to anticipating contractionary government policies.  In the Valley, we would probably benefit more if some of these federal dollars were spent on infrastructure and further props to education and health and human services funding as in the original stimulus.  Still, the payroll tax is a substantial injection of funds into the wallets of households, particularly middle-class and upper middle-class households.

The big winners are people like me.  The Making Work Pay Credit in the original stimulus maxed out at $800 for married households and phased out at higher incomes, so that people like me received virtually nothing.  With the 2% 2011 payroll tax holiday, a married couple with 2 wage earners and household income in the mid-$100s is looking at an unanticipated $3,000 increase in our disposable income in 2011.  What should we do with it?  (It will probably go towards a needed new car I have been postponing.)

A similar married household with $40,000 in wages will see a $800 reduction, the same as the credit in the 2009 stimulus bill, and lower wage earners will see even less. 

Of course, this is all paid for by adding it on to the national debt, and it is going to be hard for Congress to put the payroll tax back where it was before.  That creates a number of risks.  There is no free lunch. 

But our forecast for 2011 is brightening a little, and with it my mood for the holidays.

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