Analysts say stock prices will rise and the economy will grow further in the next quarter, depending on the fate of the Bush tax cuts.
Extending the cut for taxpayers earning $250,000 or more, set to expire on Jan. 1, could be the difference between slower growth or stalling the recovery. Temporary fixes will add to the uncertainty, Treasury Secretary Timothy Geithner said at the The Wall Street Journal CEO Council.
The Republicans want to see all the tax cuts extended. Since the party’s victories in the election, the White House has indicated room for negotiation on extending the tax cuts for high-income people temporarily, or a permanent cut beginning at $500,000 or less.
Geithner has said that allowing cuts for households at $250,000 or more to expire would not push the nation back into the recession
At Deutsche Bank, analysts said in a client note that if households at $250,000 and up see their tax cut expire, the drag on growth could be enough to make the economy stall. Deutsche invoked the example of Japan in the 1990s, which endured a “lost decade” of zero growth after tax cuts expired
The outlook at Barclays is less dire. Chief Economist Dean Maki predicts that if taxes rise only for households making $250 or more growth will slow from the current pace in the first quarter next year.—but not stall.
Predicting that “all or most” of the Bush cuts would be extended, David Kelly, chief market strategist at JPMorgan, sees “continued economic recovery.”
The likely compromise, he says, would be a permanent middle-income cut and extending the higher-income cuts for two years. Should the Republicans win more power in 2012, they would aim to make the higher-income cuts permanent as well.
Until the beginning of this month, Obama has said that he would extend the Bush tax cuts for couples making less than $250,000 a year and individuals earning less than $200,000, but cuts for wealthier people should expire if the nation is to work towards reducing the deficit.