Pres­i­dent Obama and Repub­lican leaders recently agreed to extend, for two years, tax cuts that were set to expire at the end of this month. The agree­ment would lower pay­roll taxes, con­tinue job­less ben­e­fits for the long-​​term unem­ployed, incen­tivize busi­ness invest­ments and create a plan to rein­state the estate tax. Tim­othy Rupert, a pro­fessor of accounting at North­eastern Uni­ver­sity and expert in tax code changes, explains what this means for tax­payers and the fed­eral budget.

With the budget deficit sky­rock­eting, how can we pos­sibly afford this?

At a cost of almost $900 bil­lion, a number of people (including fiscal con­ser­v­a­tives) are asking that ques­tion, because the bill pro­vides tax relief but doesn’t pro­vide for any rev­enue increases or cost reduc­tions to pay for the cuts. Others wonder whether we can afford not to act now. If the pro­vi­sions were allowed to expire, it would result in a sig­nif­i­cant tax increase and as the economy begins to show some signs of recov­ering, I think many people are wor­ried that a tax increase might seri­ously damage the recovery.

How will this affect long-​​term eco­nomic and gross domestic product (GDP) growth in 2011?

The bill is pre­dicted to help eco­nomic and GDP growth in the short term, but It’s not clear that it will have much of an impact on long-​​term eco­nomic and GDP growth. The bill basi­cally extends the ben­e­fits to which most tax­payers have already become accus­tomed, so it’s not likely to have a big impact on their behavior.

There are a few new pro­vi­sions that might have a pos­i­tive effect in the short term (for example, a pro­vi­sion to allow busi­nesses to expense all of the cost of machinery and equip­ment in 2011). But most main­tain the status quo, and based on some recent com­ments from advi­sors to the Obama admin­is­tra­tion, it sounds as if they don’t expect it to have long-​​term pos­i­tive effects. They actu­ally plan to use that as a reason to elim­i­nate the pro­vi­sions the next time that they are up for extension.

While some tax ben­e­fits to low– and mod­erate– income fam­i­lies were extended, the wealth­iest seem to be reaping the most here. Is this tax cut going mean the rich get­ting richer?

The tax act extends sig­nif­i­cant ben­e­fits for low– and middle-​​income fam­i­lies that should reduce their tax bills con­sid­er­ably, including the exten­sion of some key credits for low-​​income tax­payers and the inclu­sion of an alter­na­tive min­imum tax “patch” for middle-​​income tax­payers. And this act adds a new tem­po­rary reduc­tion in Social Secu­rity taxes, which should help low– and middle-​​income tax­payers sub­stan­tially by reducing the tax by two per­centage points for 2011. That said, there are still sub­stan­tial tax ben­e­fits for the high-​​income tax­payers, espe­cially reduc­tions in the tax rates for interest income and div­i­dends, so it’s going to be dif­fi­cult for our elected offi­cials to con­vince us that these breaks are ben­e­fit­ting everyone equally.

Was this package the best approach in helping to ease tax­payers’ fears about a still unstable economy and to help the unemployed?

I don’t believe anyone would agree that this leg­is­la­tion is the best policy. How­ever, it might be the best approach that is fea­sible right now. Remember that the expi­ra­tion of the Bush tax cuts at the end of 2010 was not a sur­prise. They have been sched­uled to end for sev­eral years, but Con­gress has been unable to come to any agree­ment on what should be done. To the extent that this bill rep­re­sents Con­gress actu­ally taking some action with respect to the tax policy, it is at least resolving some of the uncer­tainty about our tax system for the short term. The ques­tion is whether they can arrive at com­pro­mises that will create some cer­tainty for the longer term.

Recently, a pres­i­den­tial com­mis­sion released a report about ways to address our long-​​term deficit, including rec­om­men­da­tions for major changes to our tax code. Will this most recent leg­is­la­tion help or hurt those efforts?

The direc­tions offered by the com­mis­sion would result in major tax policy changes that would most likely require a great deal of com­pro­mise on the part of both par­ties. Given the dif­fi­culty of arriving at a com­pro­mise on this leg­is­la­tion and the back­lash within the Demo­c­ratic Party, the pos­si­bility that both par­ties will be able to arrive at a com­pro­mise for longer-​​term changes seems pretty small at this time. It seems likely that it will be sev­eral more years before any major tax policy deci­sions are made.