Even a temporary lapse in the tax provisions “would essentially wipe out most of the modest growth we expect in the first half of 2011,”  Goldman Sachs

Letting all of the roughly $270 billion in tax cuts lapse would subtract almost 10 percentage points from annualized disposable income growth in the first quarter of 2011. That could reduce final demand by about 2 percentage points in the first half of 2011 and cut gross domestic product by almost the same amount, Goldman’s Phillips said in his note.

Gross domestic product would be cut by almost 2 percentage points if Congress fails to extend the tax cuts, due to expire Dec. 31, along with temporary tax credits under the 2009 stimulus bill as well as relief from the alternative minimum tax, Phillips calculates.

Even a temporary lapse in the tax provisions “would essentially wipe out most of the modest growth we expect in the first half of 2011,” Phillips wrote in a research note released yesterday. He said in a phone interview that a higher tax rate in the first two months of the year would have that effect.

Bank of America’s global strategy group also issued an update yesterday that advised that “Congress will be gridlocked through year end.”

“Having consulted BofAML legislative advisors, it is now the view of U.S. Equity Strategy that Congress is unlikely to pass any tax package before the Bush tax cuts expire at 2011 start,” David Bianco, the firm’s chief U.S. equity strategist, said in the update.

“The fear of across the board tax hikes in 2011 is likely to constrain growth” in both household spending and business hiring and capital expenditures in the fourth quarter of 2010, Bianco said. “The setback to confidence is likely to prevent the S&P 500” from reaching a forecast target of 1300.

President Barack Obama and most Democrats want tax cuts enacted under former President George W. Bush extended for individuals who earn less than $200,000 a year and couples earning less than $250,000. Republican leaders in Congress want the tax cuts extended for all income groups.

Goldman Sachs’s Phillips predicts Congress will allow the tax cuts for the wealthiest Americans to expire while extending middle-class tax cuts, the “Making Work Pay” payroll-tax credit and relief from the alternative minimum tax.

“However, with essentially no congressional action to date, the prospects for such an extension are uncertain,” Phillips wrote

Goldman Sachs this month forecast economic growth at a 1.5 percent annual rate in the first quarter of 2011 and 2 percent in the second quarter, according to a Bloomberg News survey.

Letting all of the roughly $270 billion in tax cuts lapse would subtract almost 10 percentage points from annualized disposable income growth in the first quarter of 2011. That could reduce final demand by about 2 percentage points in the first half of 2011 and cut gross domestic product by almost the same amount, Phillips said in his note.

Income tax rates now are at 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent. If Congress doesn’t act, they’ll revert to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent.

http://www.bloomberg.com/news/2010-09-23/tax-cut-expiration-would-erase-first-half-u-s-growth-goldman-sachs-says.html