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Of course, delay now is better than an immediate tax hike. But because the extension is only temporary, a large portion of the investment and job growth that characteristically accompanies low taxes will be lost. When entrepreneurs and employers make decisions to start or expand an enterprise, uncertainty about tax rates translates directly into a reduced propensity to invest and to hire. With only a two-year extension, investors know that before their returns are realized, tax rates may be jacked up to the levels favored by President Obama. So while the tax deal will succeed in temporarily putting more money in the hands of consumers, it will fail to deliver its full potential for creating lasting growth.
It will also add to the deficit. In many cases, lowering taxes can actually increase government revenues. If new businesses, new investments and new hiring are spurred by the prospects of better after-tax returns, the taxes paid by these new or growing businesses and employees can more than make up for the lower rates of taxation. But once again, because the tax deal is temporary, a large portion of this beneficent effect is missing. What some are calling a grand compromise is not grand at all, except in its price tag. The total package will cost nearly $1 trillion, resulting in substantial new borrowing at a time when we are already drowning in red ink.
Part of the tax deal is a temporary reduction in payroll taxes. The president was insistent, however, that only the employee’s payroll taxes be reduced — the portion paid by the employer is to remain the same. Again, the president is looking to get more money into the hands of the consumer to boost near-term spending. But by refusing to lower the cost of hiring a new employee, he fails to encourage what the American people want even more than lower taxes — more good jobs. Like the income tax deal, the payroll tax deal will add to the deficit.
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