The Dow knows — all the Bush tax cuts will be extended

November 5, 2010

The Dow industrials are up 2 percent today as Wall Street figures out what DC insiders know: All the Bush tax cuts will be temporarily extended, more than likely during the “lame duck” session in December.  Robert Gibbs gave it all away today after Obama hinted as much yesterday:

Two days after congressional elections, White House spokesman Robert Gibbs signaled that Obama might consider a compromise with Republicans that would keep tax breaks not only for the middle-class but for wealthier Americans as well. “He’d be open to having that discussion and open to listening to what the debate is on both sides of that,” Gibbs told reporters. “Making those tax cuts for the upper end permanent is something that the president does not believe is a good idea,” Gibbs said. He said he believed the discussion would take a large part of the final weeks of this year’s U.S. congressional session.

A few more points:

1. The only question is if Obama will get much in return, such as approval for his national infrastructure bank (or likely his fave tax cuts such as the Making Work Pay credit or AMT).

2. Is this a sign of Obama shifting to the center? Look, even if Obama doesn’t want to move right, the Dem Senate will. There are a dozen Dem senators from red-states up for reelection in 2012. They are not going to follow Obama off a cliff on taxes or anything else.

3.  If all the tax cuts were left to expire, it would drop GDP growth by 2-3 percentage points. Even just letting the high-end ones expire would cost 0.2 percentage points of GDP and boost the unemployment rate by as much as 0.7 percentage points (based on Goldman Sachs’s estimate and Okun’s Law).

4.   2011 could be the year of the tax cut. GOP may put in for a corporate tax cut, and Obama may offer a payroll tax cut, in addition to his business tax cuts. Starts to look like an all-of-the above, tax cut  bidding war to boost a weak economy.

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