The Congressional Budget Office reported yesterday that allowing the Bush Tax Rate Cuts to expire at the end of this year along with the AMT “Fix”, and the previously agreed sequesters to take effect will result in another recession. From Fox News:
A new government study released Tuesday says that allowing Bush-era tax cuts to expire and a scheduled round of automatic spending cuts to take effect would probably throw the economy into a recession.
The Congressional Budget Office report says that the economy would shrink by 1.3 percent in the first half of next year if the government is allowed to fall off this so-called “fiscal cliff” on Jan. 1 — and that the higher tax rates and more than $100 billion in automatic cuts to the Pentagon and domestic agencies are kept in place.
CBO projected that the economy would contract by 1.3 percent in the first half of 2013, which would meet the traditional definition of a recession, which is when the economy shrinks for two consecutive quarters.
“Such a contraction in output in the first half of 2013 would probably be judged to be a recession,” CBO said.
The economy would rebound at a 2.3 percent growth rate in the second half of the year, however, under CBO projections.
2.3% GDP growth? NOT ! CBO and the Joint Committee on Taxation (JCT) are required by federal law to base their analysis on so-called “static,” as opposed to “dynamic,” scoring. This means that their analysis does not take into account changes in behavior that would occur due to the economic scenarios or fiscal changes being reviewed, but only considers proposed numerical changes. This can lead to lop-sided estimates… in both directions. For example, when tax rate cuts are being considered revenue estimates are almost always significantly lower than actual revenues collected. Similarly, when tax rate hikes are being considered both revenue collections and GDP growth are nearly always substantially overestimated.
What this means is that the recession predicted by the CBO report will almost surely be more severe than the projected 1.3% drop in Gross Domestic Product, and will undoubtedly last far longer than the first two quarters of 2013.
It also means that the projected 2.3% growth in the second half of the year is ridiculously over-optimistic.
The CBO study came as Capitol Hill is hopelessly gridlocked over spending and taxes in advance of the fall elections. The White House and top Democrats like Senate Majority Leader Harry Reid of Nevada say they will refuse to act on the expiring tax cuts and automatic spending cuts unless Republicans show greater flexibility on raising taxes.
“If Republicans want to walk away from the bipartisan spending cuts agreed to last August, they will have to work with Democrats to replace them with a balanced deficit reduction package that asks millionaires to pay their fair share,” Reid said in a statement.
Republicans are pressing to deal with the problem now. But they’re not showing any more flexibility on tax increases.
“You can call this a fiscal cliff. You can call it Taxmageddon as others have done,” said Sen. Orrin Hatch, R-Utah. “Whatever you call it, it will be a disaster for the middle class. And it will be a disaster for the small businesses that will be the engine of our economic recovery.”
House Speaker John Boehner has urged the Obama White House and congressional Democrats to address this issue now, rather than waiting for a “lame duck” session of Congress after the November election. Democrats, as witnessed by Harry Reid’s statement, are content to wait in the hopes of having a stronger hand after the election.
And of course, if Democrats were to lose in November they are likely to refuse to address the issue at all, leaving the tax mess, and the pending recession to incoming Republicans to deal with.
Mot surprisingly, between fundraising trips billed to the taxpayers, and campaigning for reelection, Obama has been too pre-occupied to offer any leadership on the issue of a pending recession.