by Matthew Rusling
WASHINGTON, Dec. 13 -- After a bill that extends the Bush-era tax cuts for two years cleared its first Congressional hurdle Monday, questions remain over whether the legislation can bolster the economy.
The Senate voted Monday to advance the bill through the next round of Congress, and it could reach the House of Representatives as early as Wednesday.
The bill extends the tax breaks enacted by former President George W. Bush to all earners, including those at the top, to the chagrin of many Democrats who have spoken out against such a move.
The legislation also extends unemployment benefits through next year and includes a 2 percent payroll tax break for all earners, up to 2,000 U.S. dollars.
Critics, however, argue that as the extension is temporary, the legislation's tax savings will fail to spark an uptick in consumer spending. Moreover, the bill is unlikely to spur hiring or business expansion, opponents said.
"People don't make permanent decisions for job creation and building new factories and expanding output on the basis of temporary tax cuts," Daniel J. Mitchell, senior fellow at the Cato Institute, said.
"It's not going to have a profound impact on the economy," he said.
Indeed, some experts said that when people see a temporary increase in income, they tend not to spend it. Rather, they would use it to pay down debt or prepare for harder times ahead.
Critics also charge that the bill merely keeps tax rates where they are instead of actually lowering them, which will do little to enact growth.
Others, however, said the measure would prove beneficial to an economy just emerging from the worst recession since the 1930s.
Delivering a statement from the White House on Monday, U.S. President Barack Obama said he recognized there are parts of the bill with which both parties are unhappy, and admitted that he himself shares some of their concerns.
But taken as a whole, the bill is a positive thing, he said.
"First and foremost, it is a substantial victory for middle-class families across the country who would no longer have to worry about a massive tax hike come January 1st," he said. "It would offer hope to millions of Americans who have lost their jobs through no fault of their own by making sure that they won't suddenly find themselves out in the cold without the unemployment insurance benefits that they were counting on."
Adam Looney, senior fellow at the Brookings Institution, said much of the money from the payroll tax cut and unemployment insurance will go to households strapped for cash. Those families are likely to spend the money and bolster consumption rather than save it, he said.
There are also provisions for business expensing, which allow companies to immediately write off purchasing for new investments, and that should encourage companies to accelerate their investment purchases, he said.
Some experts fret that the bill will add to the ballooning deficit, which was 1.3 trillion dollars in 2010. The legislation also raises concerns over the long-term path of interest rates.
The Joint Taxation Committee and Congressional Budget Office said the bill will cost 857 billion dollars over ten years, although in the short term its supporters expected it to reduce the unemployment rate by around 1 percent.
If more people go back to work, it could actually increase the government's tax revenue, some analysts noted.
Nevertheless, Looney said the government must eventually reconcile the gaping contradiction between Americans' appetite for spending and their distaste for taxes, although that doesn't need to happen now, in the midst of a weak economy.
Once Congress does begin to address the problem, mustering the political will to make cuts could be an issue, as the biggest spending comes from the most popular programs, such as social security, Medicare and defense, analysts said.
Obama has in recent days been plugging the bill in a bid to win the support of his own party, which staged a mini-revolt last week in the House.
In response, Obama last week presented outgoing top economic adviser Larry Summers at a White House press briefing, who contended the deal would prevent a double-dip recession. And on Friday, former President Bill Clinton appeared before reporters at the White House to endorse the legislation.
Prior to the compromise, the two parties were at odds over whether to extend the tax cuts, with Democrats pushing to exclude top earners from a tax break extension and Republicans refusing to yield on their preference for cuts for everyone.
Some conservative analysts have speculated that Obama's waiting until now to move on the tax cuts could be a political move, as enacting a two-year extension means the entire debate will have to be revisited during the 2012 elections. That could give him credibility with some voters if he decides to present himself as a class warrior against upper earners, analysts said.
