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Does the Tax Deal Satisfy the 'Three T's' for Good Policy?

Is the tax deal between the administration and the GOP the best we could get given the political environment in Washington? Probably, though it's hard to know how the deal might have turned out if the Democrats had played the same hardball negotiating style played by the other side.

Is this the best deal we could get in terms of its economic impact? Not by a long shot. Stimulus packages are supposed to be targeted, timely, and temporary, and this bill fails on all three fronts. It certainly could have been targeted better. Take the payroll tax cut. It will apply equally at all income levels and thus, in absolute terms, the highest income taxpayers will receive the highest benefit. Tilting the benefits toward those who are more likely to spend the tax cut rather than save it would enhance its impact. The same is true with items like tax cuts for the wealthy and the estate tax. The tax cut package is also much smaller than we need, and it would be a mistake to raise expectations too much (e.g. Obama's claim this will generate millions of jobs). In addition, including spending initiatives along with tax cuts could have improved its effectiveness. Overall, the details of the package -- tax cuts only for example -- were determined largely by political considerations rather than the economic impact.

Is it timely? No, it's much later than would be optimal. There are lags between the time a bill passes -- which this one has yet to do -- and the time it actually hits the economy. We don't need a stimulus several months from now, we needed it months and months ago. But, given the predictions for a very lengthy recovery of labor markets, it's certainly not so late as to do no good either.

Will it be temporary? It's supposed to be, at least according to what the bill says, but that's not the intent of the GOP regarding their favorite tax cuts. And as I noted here, it will be hard to raise the payroll tax a year from now if the economy is still lagging, as it's likely to be, and that sets it up to be extended permanently. So the budgetary impacts are likely to extend beyond the end of the recession. and that is not what we should be doing if we are going to get our long-run budget problem under control.

However, with that said, I didn't expect any further stimulus. In fact I was more concerned with the recent talk about balancing the budget, and worried that we will begin the process too soon (and those worries are still present). Thus, relative to the baseline I expected -- no further help, and perhaps counterproductive budget cuts -- this is welcome news no matter how imperfect it is from an economic perspective. Let's hope it does some good.

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