Analysis

Will 'Taxmageddon' trigger a new recession?

A new report warns that if Congress doesn't prevent automatic tax hikes and spending cuts from hitting simultaneously in 2013, the economy will go off a cliff

The Congressional Budget Office reported this week that the economy will slip back into a mild recession next year if Congress allows Bush-era tax cuts and other breaks to end just as automatic spending cuts take effect on Jan. 1, 2013. The tax hikes and spending reductions — which some are calling "Taxmageddon" — would siphon $607 billion out of the economy. If that happens, the nonpartisan CBO estimates, the economy will shrink by 1.3 percent in the first half of the year. If the changes are canceled, the recovery will gather strength. Can President Obama and a divided Congress work together to prevent disaster?

If we're depending on Congress, we're in trouble: Congress could avoid plunging off this "fiscal cliff," says Jon Healey at the Los Angeles Times, by imposing a responsible new mix of tax hikes and spending cuts rather than an automatic, across-the-board package. Washington could "actually help the economy by reducing anxiety about future taxes and interest rates," encouraging businesses to invest and expand. But given Congress' inability to reach a "grand bargain" on the deficit last year, we should brace for the CBO's doomsday scenario. "Can Congress steer us away from the fiscal cliff? Don't bet on it"

Unraveling the spending cuts should do the trick: Taxmageddon is a misnomer, says David Dayen at Firedoglake. The automatic cuts in defense and social spending under the debt-reduction deal "would hit growth much harder than the taxes." Congress can prevent the worst-case scenario by disarming the trigger that will force these automatic cuts. And letting the Bush tax cuts expire could be a good thing, because Congress could then pass "a different set of 'Obama tax cuts'" that make the wealthy pay more, help the middle class, and prevent a new recession."CBO looks at the fiscal cliff"

The best option is to punt: "No one wants all the bad stuff to happen," says Investor's Business Daily in an editorial, but if Democrats and Republicans start wheeling and dealing, they'll only make matters worse. We'll all be better off if lawmakers just "kick the can down the road," extending the tax hikes and postponing the spending cuts by one more year. Americans won't think less of them — "to judge from the polls, that's mathematically impossible.""Let the voters decide on how to close the deficit"

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