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Economics

Congress might just pass an astonishingly sensible tax deal

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THE “SECRET CONGRESS” theory holds that bills which attract public attention are born to partisan rancour, endure a life of torture and usually die a miserable death. For a recent example, look only to the much-hyped bipartisan deal that sought to patch up America’s broken immigration system and steer much-needed funds to Ukraine. It took months of work to craft the compromise; when it was unveiled on February 4th it barely lasted one business day before being left for dead. But the theory also holds that successful compromises happen all the time as long as no one makes a fuss over it.

It is with some trepidation, then, that we mention the rather good bipartisan tax deal that the House of Representatives passed by an overwhelming margin of 357-70 on January 31st. (This article will be short to avoid attracting too much additional attention.) The $78bn package trades something Democrats want—more generous tax credits for families with children—for something Republicans want: more generous tax credits for businesses. It plans to completely pay for this by eliminating a tax credit unloved by anyone, a covid-era relief programme for firms that kept employees on staff that was notoriously abused by fraudsters (95% of the time, according to one whistleblower).

If the bill actually became law there would be plenty to crow about. Capital and labour would split the spoils almost equally. Businesses would be able to immediately deduct their research and development costs. (Under current law, these must be amortised over five years.) They would also be able to deduct more aggressively some capital and, less justifiably, interest expenses. The revision of the child-tax credit would ensure that families at the bottom of the income distribution receive greater sums. (Because benefit levels scale down at low levels of income, middle-income families are currently more likely to receive the maximum credit amount of $2,000 per child than poor families.)

This proposal would not be as generous (or as expensive) as the brief policy experiment conducted in 2021, when the child-tax credit was converted into a de facto monthly child allowance, which had the effect of reducing child poverty by as much as 40%. But it would still be significant. The Centre on Budget and Policy Priorities, a left-leaning think-tank, calculates that the changes would increase benefits for 16m children in poor families and that 400,000 of them would be pulled above the official poverty line in the first year.

Some objections are already being voiced above a whisper. A handful of Republican senators have complained that the more generous child-tax credits do not come with enough work requirements on parents. There are technical reasons to think that their objections could be assuaged. The proposed redesign still preserves the “phase-in” structure whereby poor taxpayers earn more of the credit as their income increases, creating an incentive to work. A study by the Joint Committee on Taxation, the non-partisan research body in Congress, pointed out that “the proposed expansion of the child tax credit on net increases labour supply.”

What could really scupper the deal is even more attention to it. The White House called it a “welcome step forward” and urged its passage. But one side endorsing a bill often risks greater opposition by the other. “Passing a tax bill that makes the president look good—mailing out cheques before the election—means he could be re-elected,” Chuck Grassley, a nonagenarian Republican senator from Iowa, admitted a bit too truthfully to reporters. If the deal is to pass, future discussions might have to happen sotto voce.

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Economics

Tariffs to spike inflation, stunt growth and raise recession risks, Goldman says

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U.S. President Donald Trump announces that his administration has reached a deal with elite law firm Skadden, Arps, Slate, Meagher & Flom during a swearing-in ceremony in the Oval Office at the White House on March 28, 2025 in Washington, DC. 

Andrew Harnik | Getty Images

With decision day looming this week for President Donald Trump’s latest round of tariffs, Goldman Sachs expects aggressive duties from the White House to raise inflation and unemployment and drag economic growth to a near-standstill.

The investment bank now expects that tariff rates will jump 15 percentage points, its previous “risk-case” scenario that now appears more likely when Trump announces reciprocal tariffs on Wednesday. However, Goldman did note that product and country exclusions eventually will pull that increase down to 9 percentage points.

When the new trade moves are enacted, the Goldman economic team led by head of global investment research Jan Hatzius sees a broad, negative impact on the economy.

In a note published on Sunday, the firm said “we continue to believe the risk from April 2 tariffs is greater than many market participants have previously assumed.”

Inflation above goal

On inflation, the firm sees its preferred core measure, excluding food and energy prices, to hit 3.5% in 2025, a 0.5 percentage point increase from the prior forecast and well above the Federal Reserve’s 2% goal.

That in turn will come with weak economic growth: Just a 0.2% annualized growth rate in the first quarter and 1% for the full year when measured from the fourth quarter of 2024 to Q4 of 2025, down 0.5 percentage point from the prior forecast. In addition, the Wall Street firm now sees unemployment hitting 4.5%, a 0.3 percentage point raise from the previous forecast.

Taken together, Goldman now expects a 35% chance of recession in the next 12 months, up from 20% in the prior outlook.

The forecast paints a growing chance of a stagflation economy, with low growth and high inflation. The last time the U.S. saw stagflation was in the late 1970s and early ’80s. Back then, the Paul Volcker-led Fed dramatically raised interest rates, sending the economy into recession as the central bank chose fighting inflation over supporting economic growth.

Three rate cuts

Goldman’s economists do not see that being the case this time. In fact, the firm now expects the Fed to cut its benchmark rate three times this year, assuming quarter percentage point increments, up from a previous projection of two rate cuts.

“We have pulled the lone 2026 cut in our Fed forecast forward into 2025 and now expect three consecutive cuts this year in July, September, and November, which would leave our terminal rate forecast unchanged at 3.5%-3.75%,” the Goldman economists said, referring to the fed funds rate, down from 4.25% to 4.50% today.

Though the extent of the latest tariffs is still not known, the Wall Street Journal reported Sunday that Trump is pushing his team toward more aggressive levies that could mean an across-the-board hit of 20% to U.S. trading partners.

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Economics

DOGE comes for the data wonks

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FOR NEARLY three decades the federal government has painstakingly surveyed tens of thousands of Americans each year about their health. Door-knockers collect data on the financial toll of chronic conditions like obesity and asthma, and probe the exact doses of medications sufferers take. The result, known as the Medical Expenditure Panel Survey (MEPS), is the single most comprehensive, nationally representative portrait of American health care, a balkanised and unwieldy $5trn industry that accounts for some 17% of GDP.

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Economics

Checks and Balance newsletter: Who is (or was) the smartest person in government?

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Checks and Balance newsletter: Who is (or was) the smartest person in government?

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