(Bloomberg) — The U.S. economy is on track to receive an unexpected fiscal boost if lawmakers support $70 billion in tax cuts for businesses and families.
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Congressional negotiators are in talks to renew expired business tax breaks and expand the child tax credit, with both sides on a 50-50 split. Some Republicans have called for deep spending cuts to avoid another government shutdown on Jan. 19, when temporary funding expires, and again on Feb. 2. It would have to pass through Congress, where opinions are sharply divided over the route.
If passed, this tax cut bill would be a double-edged sword for an economy that appears to be headed for a soft landing.
Economists warned that while the extra cash would boost consumer spending, it also risks reigniting inflationary pressures, complicating the outlook for the Federal Reserve to cut interest rates this year. Data from December showed that while the decline in prices slowed, inflation accelerated at the end of 2023, driven by service costs. The consumer price index rose 3.4% in the year to December, the highest in three months. The prices of clothing and cars continue to rise.
Mickey Levy, a visiting fellow at the Hoover Institution, said the tax measures would provide additional fuel to an economy that is already growing faster than estimates of long-term potential. The legacy of pandemic-era fiscal stimulus continues to drive growth, he said.
“Significant fiscal stimulus has already boosted economic activity,” he said.
Analysts say much will depend on the final details of the deal and how the tax cuts will be structured. The draft agreement would extend the suspension period until 2025.
Talks remained in flux as lawmakers depart for the long weekend on Friday. After stalling progress earlier this week, several potential prospects for bipartisan agreement include disagreements over caps on state and local tax credits, expansion of the low-income housing tax credit and stronger child tax credit. A major obstacle emerged.
Mark Goldwein, senior policy director at the Committee for a Responsible Federal Budget, which advocates for reducing deficits and debt, said a deal could mean money could start flowing into households as early as March. Stated. He warns that the proposal will do little to encourage companies to invest more.
business break
The proposed agreement would restore tax breaks for research and development spending and increase deductible amounts for investments such as equipment and business loans. Lawmakers are debating limiting profits on overseas research investments to cover companies that conduct research activities in the United States.
“This would be a significant fiscal cost, but it would do little to encourage new investment while inflationary pressures still exist,” Goldwein said.
Still, the plan could be a boon for President Joe Biden, whose poll numbers have slumped amid voter anxiety about the economy. Asked how the White House was considering the potential inflationary impact of any proposals, Biden’s chief economic adviser instead emphasized the bill’s benefits.
“We’re very hopeful that we’ll get a balanced package,” National Economic Council Director Lael Brainard said Thursday. “But it’s important to the president that the child tax credit be expanded and made especially available to low-income and moderate-income families, because the child tax credit is so powerful in reducing child poverty. be.”
child credit
The child tax credit increase being considered as of last week would not be as large as the coronavirus-era tax credit, which increased the maximum credit from $2,000 to $3,600 per child. Additionally, those who owe no tax liability will not receive a full refund and will not be paid monthly. Those details could change as many Democrats have vowed to block the current deal.
Nancy Vanden Houten, chief economist at Oxford Economics, said the overall size of the tax package is not enough to derail expectations that the Fed will cut interest rates in May.
“The impact on the broader economy will be relatively small and probably not enough to change inflation or the Fed’s outlook,” Hooten said.
At the very least, the latest tax negotiations highlight that even as rating agencies and investors warn that America’s fiscal trajectory is unsustainable, lawmakers are still far from entering an era of austerity.
tax season
Moody’s Investors Service warned in November that it could downgrade the U.S. sovereign rating, citing widening budget deficits and political polarization. While the outlook was downgraded from stable to negative, the rating remained unchanged at Aaa. Fitch Ratings downgraded the US rating in August.
If the tax proposal is agreed to, negotiators aim to have it enacted by Congress by January 29, the start of the annual tax season.
“If the bill passes, it would just be another blow to an economy that either needs it or doesn’t need it,” said Owen Tedford, senior research analyst at Beacon Policy Advisors LLC. said.
–With assistance from Erik Wasson.
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