On tax deal, a contradiction comes with an explanation

WASHINGTON - The tax-cut compromise would add $900 billion to the nation's budget deficit over the next two years and sharply boost debt, yet the U.S. Chamber of Commerce and other deficit hawks are cheering it.

It's a question of timing.

The deal to extend Bush-era tax cuts and other benefits, at a cost of $900 billion in lost revenue, came days after a bipartisan deficit-reduction panel warned last week that the nation is on a path to fiscal ruin if it can't get deficits and debt under control over the next decade.

The panel's warning followed November's midterm elections, when polls showed that the deficit was a key concern of independent voters.

Yet President Obama and congressional Republicans have teamed up to propose borrowing an additional $900 billion.

Despite the apparent contradiction, most experts believe adding to the deficit over the next year or two won't worsen the problem - if Washington puts the nation on a path to tame deficits in ensuing years.

"If they can come up with a better system within two years, that may be entirely consistent," said Diane Lim Rogers, chief economist for the Concord Coalition, a bipartisan group dedicated to balanced federal budgets.

"It's not going to work out well if this is just another kicking of the can down the road and two years from now we just extend them again," Rogers said.

Obama and his newfound Republican partners are betting that a short-term increase in the deficit will help prod the economy by eliminating fear of higher taxes, boosting spending as a wage-tax cut and continued unemployment payments put money in the hands of consumers, and giving businesses tax incentives to hire.

"Most economists thought that if taxes go up it could really hurt growth," said Nariman Behravesh, chief economist for forecaster IHS Global Insight. "And you really added some net new stimulus. That's going to help growth a little bit, adding half a percentage [point] of growth for a few quarters. . . . With the economy still struggling, every little bit helps."

There's little evidence extending the tax cuts for the wealthiest 2 percent will boost economic activity significantly, but ending the threat of an increase is expected to reduce uncertainty.

That's one reason business groups such as the Chamber of Commerce applauded.

The deal "will go a long way toward helping our economy break out of this slump and begin creating American jobs," executive vice president Bruce Josten said.

Others saw the deal as helping at least to keep the economy from sliding back.

"I think the compromise is mainly about avoiding 'contractionary' policies, and not so much a new thrust to economic activity," said Rudolph Penner, who directed the nonpartisan Congressional Budget Office from 1983 to 1987. "The one exception to that is the payroll-tax holiday."

That proposal, for a one-year wage-tax cut, would lower the 6.2 percent of income that all workers contribute to Social Security by 2 percentage points. That would cost $120 billion in lost revenue, according to White House estimates, which would be covered by borrowing.

It would replace the president's Making Work Pay credit, a partial payroll-tax credit this year for some workers that was heavy on paperwork.

Unemployment benefits would be extended for 13 months, adding $56 billion to the deficit, but economists like these payments because recipients spend the money almost immediately, thus providing a quick boost to the economy.