CBO: Tax hikes would put the economy back in recession

While President Barack Obama’s re-election strategy is focused on class warfare and attacking private capital, the Congressional Budget Office is warning that the coming “Taxmageddon” at the beginning of the year would send the economy reeling back into a recession:

Tax hikes and spending cuts set to take effect in January would suck $607 billion out of the economy next year, plunging the nation at least briefly back into recession, the nonpartisan Congressional Budget Office said Tuesday.

Unless lawmakers act, the economy is likely to contract in the first half of 2013 at an annualized rate of 1.3 percent, the CBO said, before returning to 2.3 percent growth later in the year.

Canceling those tax and spending policies would protect the recovery in the short run and encourage more vibrant growth, around 4.4 percent, in 2013, the CBO said. However, unless lawmakers adopt policies that would reduce budget deficits by a comparable amount down the road, the CBO said, the national debt would continue to climb, imperiling future economic growth.

The report, “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013,” comes as policymakers are bracing for the most consequential battle over government tax and spending policies in years. The George W. Bush-era tax cuts are set to expire on Dec. 31, along with a payroll tax cut proposed by President Obama. Meanwhile, sharp cuts are scheduled to hit the Pentagon and other federal agencies to meet a deal cut during last summer’s showdown over the nation’s debt limit.

A couple of things about this. I don’t disagree that increasing taxes — or doing nothing to extend these tax cuts, which is what Obama and most Democrats want — would lead to an economic downturn. However, temporarily extending them isn’t going to spur growth. Businesses, for example, tend to plan longer than short-term windows and uncertainty prevents them from investing because they don’t know how economy will function a few years down the road.

Obama’s reasoning for extending the Bush-era tax cuts at the end of 2010 was because ending them would result slower economic growth. Now, we’ve had slower economy growth and poor job creation, but that’s a result of ObamaCare and other burdensome regulations that discourage expansion and investment and the continuing EuroZone crisis.

The other problem here is the belief that spending cuts will hurt the economy. Or as The Freeman said yesterday, “[T]he misconception that spending cuts cause recessions.” Research produced last month showed that spending cuts actually spur economic growth and are the “only historically reliable way to lower deficits and debt.” Austerity works provided it’s done right.

But we’re stuck at an impass in Washington. Obama and Democrats wants to raise taxes and don’t want much in the way of deficit reduction through spending cuts. Republicans want to keep current tax rates or enact reform, but don’t want to touch defense spending, which is a significant part of federal outlay. Either way, no one is serious about getting anything done, and because of that they are leaving a time-bomb set to go off at the beginning of 2013.


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