Monday, April 23, 2012

We're 8 Months Away from Being Massively Screwed by Tax Increases

Taxmaggedon is coming. Remember the Bush tax cuts? Well they are expiring on January 1, 2013. The payroll tax cut? It's expiring on January 1, 2013. The AMT patch? You guessed it, it expires January 1, 2013. In all, taxes are set to go up by a whopping $494 billion in just 8 months time (that what happens when you keep kicking the can down the road). And I am not talking about them going up that amount over a 10 year span, but all in one year. If you looked at it on a 10 year budgetary perspective, we are talking about a $5 TRILLION tax increase. Heritage has a nice handy dandy chart summary of the taxes that are increasing and the amounts:

Just to give you a sense of how big this is, $494 billion is equal to 3.4% of GDP, that is 3.4% of GDP that is going to be taken out of people's pockets and given to the government. Can you say recession? If Obama's old Chair of Economic Advisers is correct and the multiplier on taxes is 3 (a dollar of tax increases lowers GDP by $3) we could see GDP fall by 10.2%!

Now I know that there is a good chance that as we are looking at the fiscal cliff, that Obama and Congress will kick the can down the road again with some sort of temporary fix, letting the next President and Congress deal with it. But, I also think there is a chance that they aren't able to. How do you kick so many cans down the road at the same time, especially at the height of campaign season with so many people out of their offices and with every move under the microscope. Republicans will be under pressure not to help Obama (especially after being screwed in previous dealings with the President e.g. the Supercommittee) and Democrats will be under pressure to not "cut" taxes again on the "rich". There are also just too many programs to extend with too many moving parts. Think about it even if they decide to keep the Bush tax cuts, that only eliminates about one third of the fiscal cliff, they need to agree on a plethora of other issues to meaningfully minimize the cliff.

I also think that it is only a matter of time before the uncertainty of what is going to happen in 2013 bleeds into this year. Right now, very few people are talking about this and people seem to be spending like normal, but what happens when September rolls around and people see this looming iceberg right in front of them? They will very easily be able to calculate that they will be making thousands less next year than this year. It's just insane.

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