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Bush tax cuts 101: Would extension boost the economic recovery?

The short answer is yes. Forecasters anticipate that extending the Bush tax cuts, as well as other measures in the Obama-GOP deal, will breathe life into the economic recovery.

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Mark Zandi, chief economist at Moody's Analytics, now predicts roughly 4 percent GDP growth next year – with a bit more than 1 percentage point of that coming from the tax-cut package. Unemployment could drop to 8.5 percent by the end of next year, he figures, a big improvement from his current outlook of 9.6 percent.

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Not all economists predict such strong growth next year, or as big an impact from the tax cuts.

But at the very least, economists say the removal of uncertainty about whether Bush-era tax rates will expire would reduce the risk of slipping back into recession, due to consumer and job-market weakness.

At best, the tax cuts could help the economy gather self-sustaining momentum. Increased consumer spending could nudge more employers to hire, which in turn could put still more money in consumer bank accounts.

In an interview televised Sunday, Federal Reserve Chairman Ben Bernanke said the economy needs growth of about 2.5 percent just to keep the unemployment rate steady. That's because an average of 125,000 people are expected to enter the labor market each month. In the past three months, the economy has been adding only about 60,000 jobs a month.

The Obama-GOP deal

Centerpieces of the framework Obama announced this week include:

• Keeping the Bush tax cuts in place for two more years.

• Extending unemployment benefits for the long-term jobless.

• Providing new incentives for business investment.

• Reducing the payroll tax rate paid by working Americans for next year to 4.2 percent rather than 6.2 percent. That lift in paychecks would give millions of families an extra $1,000 or so to spend in 2011.

• Setting the estate tax at 35 percent (it is currently slated to be 55 percent next year), with an exemption for $5 million in assets.

Although boosting after-tax income for rich and poor alike, tax cuts would mean more borrowing by the government.

Higher federal deficits now mean more debt to pay off later. Some economists, who see a relatively small chance that the economy will dip back into recession, argue that more federal stimulus is unneeded and unwise.

The countering view, held by both Obama and many private sector economists, is that reviving GDP growth and reducing unemployment is the only way to ensure a healthy stream of future tax revenues. Today's tax cuts can be followed fairly soon with a long-term deficit reduction plan – as outlined recently by the president's bipartisan fiscal commission.

Moody's Analytics pegs the overall scale of the tax breaks at $592 billion in 2011 and $388 billion in 2012.

About half of the total stems from extending Bush income-tax rates and a longstanding "AMT patch" to prevent the alternative minimum tax from hitting more middle-class households. The rest is mostly accounted for by reductions in business, payroll, and estate taxes.

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