Stimulating Tax Law

If the tax codes of 2010 had been allowed to expire (the “Bush tax cut” and other provisions), there would have been a detractor from GDP. With the extension of the 2010 tax levels and the addition of extended unemployment benefits and payroll tax reduction for 2011, there are factors that should add to GDP. Global Economic Intersection has estimated the drag on GDP in nothing had been done would be about – 0.9%; the stimulus with the passage of the new tax law is about +1.6%. These effects are shown in the following graph:

tax graph

Photo: Global Economic Intersection

The first pass analysis is summarized in the following table. The largest effects for GDP come from the payroll tax cut for 2011 (by far the largest impact), the extension of federal unemployment benefits and the child tax credit (and related item).

Of course, the cost of this is over half a trillion additional increase in the national debt in 2011. This is nearly $190 billion more than the projected GDP benefit.

If nothing had been done, it is possible that the drag on the economy could have produced a dip back into recession. That might have cost the national debt more than the $554 trillion estimated for the effect of the new tax law in 2011.

tax graph

Photo: Global Economic Intersection

See Global Economic Intersection for first pass analysis details.

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