Tax Cuts May Spur U.S. Economy

Jillian Bandes | December 08, 2010 8:54 AM

Well, lookie here! Turns out the massive tax deal that's being negotiated by President Obama may be enough to convince the Federal Reserve that more drastic measures to prop up the U.S. economy aren't necessary. The Fed might reduce it's $600 billion bond-purchase program next year if the economy responds to the incentives it's being given....possibly raising GDP by half a percentage point, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., in an interview with

Bloomberg. Another economist, Tom Porcelli, oft RBC Capital Markets Corp. in New York, had similarly rosy expectations.

The agreement goes beyond what economists were expecting by including a 2 percent cut in payroll taxes, which fund Social Security and Medicare. The proposal also sets the estate tax at a top rate of 35 percent, extends aid for the long-term unemployed by 13 months and would allow companies next year to deduct the full cost of investments in equipment.

Stocks rallied after the agreement was announced, sending the Standard & Poor’s 500 Index to the highest level since the financial crisis in September 2008. Gains were erased in the final hour of trading after Obama said he’ll push to overhaul the tax code in two years. Treasuries fell and copper rose to a 31-month high.