Strategic Briefing | 5.21.12 | Taxmageddon & The Economy

How ‘Taxmageddon’ would affect the U.S. economy
The Washington Post | May 17
What will the economy look like in 2013? A great deal depends on what Congress decides to do at the end of this year. Remember, the Bush tax cuts are expiring, the payroll tax holiday will sunset, and a bunch of new spending cuts under the debt-deal “sequester” are scheduled to kick in. Coming all at once, that’s a potentially big drag on growth.

Three Views of the ‘Fiscal Cliff’
Ed Lazear (The Wall Street Journal) | May 20
It’s the tax increases we have to fear. Spending cuts won’t hurt the economy.
Why America Should Stop Worrying and Love Taxmageddon
James Kwak (The Atlantic) | May 10
A decade ago, President Bush passed temporary tax cuts, betting that they would have to be made permanent to avoid an unpopular tax “increase.” Everything is going according to schedule.
The Economy’s Ailments and the Best Fiscal Policy Prescriptions
The Concord Coalition | May 15
The latest economic news and the CBO analysis serve as a reminder that any deficit reduction efforts over the next year need to be designed so as to not stifle personal consumption too much in the short term and yet substantially and credibly increase public saving over the longer term. The President’s budget proposals seem to be appropriately mindful of the short-term fragility of the economy. But in the longer term, their deficit financing becomes the most significant feature in terms of their (adverse) economic effects, causing their costs to outweigh any of the economic benefits associated with the finer structure of the policies. The best way to turn the longer-term numbers around is to keep the basic structure of the policies but change their financing — i.e., offset their cost without offsetting their good incentive effects.
Speaker Boehner pledges to hijack the debt ceiling and jeopardize recovery again
Economic Policy Institute | May 17
There are only two theoretical ways in which long-term deficit reduction can accelerate economic recovery. First (and actually plausible), a long-term deficit reduction “grand bargain” could include substantial near-term fiscal stimulus and gradually phase-in deficit reduction after some macroeconomic trigger is met (e.g., EPI proposed a “6-for-6” trigger: unemployment at or below 6 percent for six consecutive months). Second, deficit reduction could lower the premium on government borrowing, and thus private interest rates. This second channel actually has no hope of actually working today, as longer-term Treasury yields are already at historically low levels. Making all future increases in the debt ceiling completely uncertain and chaotic, however, will almost certainly impede both channels in the future.
Dems Return Fire on Boehner over Fiscal Crisis
The Fiscal Times | May 17
“If you try to restore fiscal balance without a penny of additional revenue, then you have to cut deeply—too deeply—into critical functions of government,” he said. “Just one example—the cost of extending the Bush tax cuts for the top 2 percent of earners for the next decade is about one trillion dollars. Tax cuts do not pay for themselves. You have to pay for them. We can’t afford to borrow the money to extend those tax cuts, and we won’t agree to cut benefits for seniors or cut investments in education to pay for those tax cuts.”
The 2012 Tax Policy Two-Step: Taxmageddon, Then Tax Reform
The Heritage Foundation | May 9
The nation faces an unprecedented tidal wave of tax hikes on January 1, 2013. Aptly called “Taxmageddon,” at nearly $500 billion the tax hike is so massive that it has accomplished what many regarded as impossible: consensus. There is broad agreement that at least most of this tax hike must be prevented. The debate is really only about how much and when.
At the same time, there is a growing consensus in favor of tax reform. Both President Obama and the presumptive Republican presidential nominee Mitt Romney have called for reducing corporate income tax rates substantially. With such an obvious need, many Members of Congress, echoing their constituents’ views, are frustrated with the lack of progress on tax reform. Many also express a reluctance to prevent Taxmageddon without tax reform, suggesting that doing so smacks of once again “kicking the can down the road.” While these frustrations are understandable, nevertheless as matters stand, the correct two-step sequencing Members should embrace is to prevent all tax hikes now while working on and for tax reform in 2013.