Automatic Tax Increases and Spending Cuts Could Bring Recession

Oct 2, 2012

We received more warnings about the danger to the economy of automatic tax increases and spending cuts set to take place in January 2012.

Out of 17 economists surveyed by CNN, 14 believe we’ll fall into another recession if Congress and the administration do not act to avoid going over the “fiscal cliff”:

Twelve of them believe the fiscal cliff is the most serious risk facing the economy, more serious than the European sovereign debt crisis, business uncertainty about various government regulations or the continued weakness in the job and housing markets.

"Should gridlock prevail, business sector investment and hiring will be stymied, and the household sector will sharply curtail spending," said Patrick O'Keefe, director of economic research for accounting firm JH Cohn.

This echoes the Congressional Budget Office which also warns of a recession.

Along with the economists’ views, a Tax Policy Center study concludes that households will get hit with a $3,446 tax increase if nothing is done. Howard Gleckman at TPC’s TaxVox blog writes, “Nearly 9 of every 10 households would pay higher taxes.”

There are hints that some in Congress are trying to find a solution. Here’s what Bruce Josten, Executive Vice President for Government Affairs, urged Congress to do:

In the immediate-term, legislation must be enacted to extend all of the 2001 and 2003 tax rates (including current marginal rates, dividend and capital gains rates, and estate tax relief), to extend vital expired and expiring business tax provisions, and to provide alternative minimum tax (AMT) relief. We urge you to act expediently to find spending cuts to replace a sequestration never intended to go into effect.

Then Congress must move onto fundamental tax and spending reforms—especially on entitlement programs—to improve economic growth and put the federal government on a fiscally-balanced path.

With effective leadership, this crisis can be avoided.

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