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Surviving "Taxmageddon" Without Maiming Economy

Author: Peter R. Orszag, Adjunct Senior Fellow
April 25, 2012
Bloomberg.com

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The nation is hurtling toward what has been called "taxmageddon," the enormous tax increases and spending cuts scheduled for the beginning of 2013. At around the same time, we will also be spending some more quality time with our old friend: the debt limit.

No one can yet see a plausible way through the coming storm. But even though they are not particularly inspiring, paths away from catastrophe do exist.

First, some brief background. At the end of this year, all the Bush tax cuts expire -- amounting to about $250 billion a year. The payroll-tax holiday, at more than $100 billion a year, ends too, as do expanded unemployment-insurance benefits. And we face other spending cuts of about $100 billion, from the sequester set up by the 2011 debt-limit deal.

All told, this fiscal tightening adds up to about $500 billion -- or more than 3 percent of gross domestic product. The economy will be in no shape to handle that much of a squeeze. If we do nothing to reduce or stop it, the economy could be thrown back into a recession.

As if that were not challenging enough, we are expected to bump back up against the debt limit, which currently stands at $16.4 trillion. Projections suggest we will approach the limit in the fourth quarter of 2012. Then, the Treasury secretary will take temporary measures to allow continued issuance of debt. The Bipartisan Policy Center estimates those actions will get us to February 2013 -- at which point we will hit the debt-limit wall. If the economy is weaker than expected, it will widen the deficit faster, and we'll hit the wall sooner.

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