December 13, 2010

Tax deal costs much less than original stimulus package

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Even with the latest polls showing nearly 7 out of 10 Americans support the recent tax deal, detractors are saying that this will cost $858 billion, which on paper is nearly as much as the first stimulus package. This thinking is flawed, says economist Antony Davies, because the stimulus was all spent in 1 year.

Davies cites a CBO report from early 2009 that projected that the entire stimulus report will cost $3 trillion in 10 years. This means that over the same period of time – 10 years – this package will cost the same amount as 20% of the original stimulus.

“Tax cuts are very different from stimulus spending. Stimulus spending is a drag on the economy, while tax cuts are what stimulate the economy.”

Davies does see potential problems with this deal, stemming from short-term nature of the plan.

“If people anticipate that their taxes will rise in the future, they are hesitant to spend,” said Davies. “The government needs to announce the tax cuts are permanent – that’s when you’ll see the economy pick up because people can plan.”

Image provided by Flicker user theblog.