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History may well remember 2012 as the year our leaders finally drove the United States off a fiscal cliff with their disastrous tax and spending policies.
America’s economy teeters on the brink of a media-dubbed “taxmaggedon,” a ticking time bomb of policy triggers that, together with deep spending cuts that are scheduled to take effect around the same time, could send our economy back into a recession if we fail to prevent them.
Consider what’s set to occur by the end of this year:
For starters, the Bush tax cuts will expire Dec. 31 — all of them, not just the tax cuts for the highest earners. That will mean across-the-board tax increases for most taxpayers. The capital gains tax will rise, and the special break for dividends will end entirely. Also set to expire are key provisions in the economic stimulus bill of early 2009.
As a result, taxpayers will see reductions in the child credit, earned income tax credit and American opportunity tax credit. The estate and gift tax rules will return to where they were in 2001, and married couples will see a tax increase.
On top of this, the payroll tax holiday and 67 other tax provisions will expire this year, including a deduction for elementary and secondary school teacher expenses, a deduction for qualified tuition expenses and more. Already gone is protection from the effects of the alternative minimum tax for millions of taxpayers. Without new legislation, millions of middle-class taxpayers will see their 2012 income taxes rise by thousands of dollars.
The spending side of the budget will bring another set of problems. The 2011 Budget Control Act stipulated that if policymakers did not craft a plan to reduce budget deficits by $1.2 trillion over the next 10 years, automatic spending cuts to achieve that goal would begin to kick in by early January.
But wait — there’s more.
Analysts predict that the federal government will bump up against the existing legal limit on outstanding national debt (the “debt ceiling”) late this year or early next, which could bring a repeat of last summer’s Congressional showdown on raising the debt ceiling that prompted Standard & Poor’s to downgrade U.S. government debt from AAA to AA+.
Policymakers could begin to remedy many of these problems by enacting real tax reform rather than short-term fixes. But the chance of that this year is zero. Not only are we saddled with a Congress that has set a new standard for partisanship, but we face an election year in which both parties have a vested interest in ensuring that the other’s legislative proposals fail.
Think about the potential consequences. The Congressional Budget Office predicts the tax increases and spending cuts slated to take effect in January 2013 will likely lead to a recession. By its estimate, the economy will shrink 1.3 percent in the first half of 2013, followed by a meager 2.3 percent growth in the second half of 2013.
Another U.S. recession would certainly tip the global economic scale downward, particularly in Europe, where Greece and Spain already face their own fiscal crises.