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Economy Update: The ‘Taxmageddon’ Debate

by Newsteam Staff
April 27, 2012

A demonstrator at a tax day protest in Oakland, California April 17, 2012 (Stephen Lam/Courtesy Reuters). A demonstrator at a tax day protest in Oakland, California April 17, 2012 (Stephen Lam/Courtesy Reuters).

Former and current advisers to the presidential candidates are taking a critical look at the tax issues on the table as the debate ratchets up over who has the best prescription for ballooning debt and deficits.

With Bush-era tax cuts set to expire at the end of the year and major budget cuts expected under last year’s debt-limit deal, CFR’s Peter Orszag, Obama’s top budget official until July 2010, says in Bloomberg if lawmakers do not stop or mitigate what has been dubbed “taxmageddon” the economy could be thrown back into recession. Orszag says that while not inspiring, “paths away from catastrophe do exist” (Bloomberg), outlining possible congressional scenarios for both a Mitt Romney and Barack Obama win in November, particularly during the lame-duck session.

“In navigating through the coming storm, we need to avoid undue fiscal contraction (and preferably provide additional support to the economy if the unemployment rate remains elevated) but also recognize that enacting a debt-limit increase will require some long-term deficit reduction — which would be desirable in any case,” Orszag says. “The coming debate thus shows, once again, the benefit of a dual strategy in which we continue to provide stimulus to the economy in the short run but enact substantial deficit reduction that takes effect down the road.”

In a Washington Post op-ed, former Obama economic adviser Larry Summers warns against giving too much credence to campaign budget proposals not subject to official budget score-keeping and independent evaluation, particularly Romney’s proposal for $5 trillion in tax cuts on top of extending the Bush-era cuts.

Summers is also critical of Romney adviser Glenn Hubbard’s Wall Street Journal op-ed lambasting the proposed Buffett Rule and Obama’s spending plans.

Hubbard argues Obama’s budget will mean not just needing to increase taxes on the wealthiest but on everyone. “Assuming the president favors raising marginal tax rates over broadening the tax base (consistent with his failure to consider the tax proposals from Bowles-Simpson), an across-the-board tax increase of 11 percent for taxpayers with incomes under $200,000 would be required to raise the money the president proposes to spend,” Hubbard says.

For more on the candidates’ stances, check out CFR’s Issue Tracker on The Candidates and the Economy.

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CFR’s Michael Hodin warns in a Huffington Post op-ed the current tax structure is not set up to support an aging U.S. population. “If Boomers are going to take from their grandchildren at a seven-to-one clip, then there’s not much prosperity on the horizon,” he says. “Especially if we continue to assume a growing tax burden on those who are traditional working age.”

Brooking’s William Galston, who would reluctantly let the Bush tax cuts expire, says the focus should be on broadening the tax base by reducing tax expenditures and follow the lead of other countries with consumption taxes such a carbon tax or Value Added Tax on goods.

If Congress and President Bush, ten years ago, had implemented a progressive consumption tax in the first place AEI’s Matthew H. Jensen and Veronika Polakova estimate GDP might be $16 trillion this year rather than a likely $15.5 trillion, and the budget deficit more than a trillion dollars lower. “The government would have an extra $72 billion of revenue in 2012 alone, and the gains would continue to grow for many years,” they say. “That’s 4.5 times the Buffet Rule’s haul, and it would come from boosting growth rather than hiking taxes.”

– Gayle S. Putrich, Contributing Editor

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