Irwin Kellner warns of looming recession when "Taxmageddon" hits
Unless Congress and the president take action soon, the ship of state will run into massive fiscal restraint come the New Year.
Seven months from now, taxes will rise while spending will be cut -- each by sizable sums. This restraint will be imposed even though the great majority of economists would argue that the economic recovery is so precarious that, if anything, the reverse would be called for -- that is, lower taxes and more spending.
Let me give you an idea of the magnitudes. Taxes are scheduled to go up by a whopping $500 billion, while spending is set to drop by more than $130 billion.
On the tax side, one-third will come from the expiration of the Bush tax cuts of 2001 and 2003. Another 25% will occur as a result of the end of the temporary payroll tax cut, while another 25% will emanate from the expiration of the AMT patch.
The rest will come from tax hikes related to Obamacare, the end of the 2009 tax extenders and a rather sizable jump in the estate tax. There is something for everyone; I call it taxmageddon.
And if this were not a blow to the economy's solar plexus, consider the drop in spending mandated to occur at year-end under current law. The $130 billion will also affect a broad swath of the country, from defense, to Head Start, to Pell Grants, as well as to states and local governments.
Put the tax hikes and spending cuts together, and they amount to a thumping 4% of our gross domestic product. A speed bump this size would be enough to slow a healthy economy; a weak one such as we are now experiencing could very well stop short and go into reverse. In other words, back into a recession.
And don't think for one minute that this scenario will not unfold until 2013. It will very likely become noticeable sooner -- say around Election Day.
It does not take a rocket scientist to figure out why.
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