The Fiscal Cliff and the Next Recession

December 18, 2012

If nothing is done by January 1, taxes will increase while federal spending is cut. Under current law, increases in the top rate of nearly every major federal tax will go into effect on January 1 because the Bush tax cuts expire and tax increases to pay for ObamaCare go into effect, says Peter Ferrara, a senior fellow at the National Center for Policy Analysis.

  • Under the deal made last summer, federal spending will be cut $103 billion.
  • Of that, $61 billion will be in defense cuts, $26 billion from the expiration of emergency unemployment benefits, and $11 billion from a reduction in Medicare payments to physicians.
  • In addition, the top two income tax rates will jump by about 20 percent.
  • The capital gains tax rate will also increase by about 60 percent while the tax on dividends will nearly triple.
  • Furthermore, the Medicare payroll tax rate will skyrocket by 62 percent while the top rate on the estate tax will rise by 57 percent.

In addition, Americans face many new regulatory costs and burdens that the Obama administration has delayed until now.

If nothing is done about the fiscal cliff, there will be serious economic implications:

  • There will be a recession in 2013 with the gross domestic product (GDP) dropping.
  • Unemployment will rise to about 9 percent in the same year.
  • Moreover, inflation is expected to rise to 2 percent annually over the next few years.
  • However, if action is taken to avert the fiscal cliff, real GDP would increase by 1.4 percent and full-time employment would increase by 1.8 million jobs by the end of next year.

President Obama wants higher tax revenue and an increase in federal spending in any sort of negotiation over the fiscal cliff. However, the policies of the past four years have resulted in the weakest recovery from a recession since the Great Depression.

Additionally, people are less inclined to save and make investments if they think the government is simply going to collect more from them. Instead, the United States needs to incentivize people to invest and workers to become more productive to earn higher wages by reducing taxes and other regulatory burdens.

Source: Peter Ferrara, "The Fiscal Cliff and the Next Recession," National Center for Policy Analysis, December 18, 2012.

 

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