Here are the stakes: The US economy is growing so slowly right now that if just about anything goes wrong, anything at all, it could mean another recession — quite possibly pushing unemployment back to the worst levels of the Great Recession.
To use President Obama’s once-favored metaphor, the car would be back in the ditch, stuck worse than ever. Welcome back to 2009.
Yet the Obamacrats in Washington are flirting with steering right at the ditch, by letting some $400 billion worth of tax hikes engulf the struggling economy on Jan. 1.
Under current law, that day will see the the 2001 and 2003 Bush tax cuts expire, even as the new ObamaCare investment tax kicks in.
Marginal federal income-tax rates (for the four brackets) would jump from 25/28/33/35 percent to 28/31/36/39.6 percent. The child tax credit would fall to $500 from $1,000.
And tax rates on capital gains would jump to 20 percent from 15 percent, while dividends would be taxed as ordinary income (28 percent to 39.6 percent) vs. 15 percent now.
Add in the new 3.8 percent ObamaCare tax, and those rates on capital gains and dividends would go to 23.8 percent and (in the top bracket) 43.4 percent.
All that, during a weak recovery notable for its lack of private-sector investment and paucity of startup firms going public.
But Sen. Patty Murray (D-Wash.), who heads the Democratic Senatorial Campaign Committee, says her colleagues won’t accept any deal to avoid the “fiscal cliff” if it means also extending the upper-income tax cuts, even temporarily: “If we can’t get . . . a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013.”
Obama is no better on the issue. Not only does he want those Bush “tax cuts for the rich” to expire right on schedule, he’d only extend the Bush middle-class tax cuts for a year.
The mere possibility of this tax-hike tsunami is now weighing on business and consumer confidence, which are at levels more typical of an economy already mired in recession. In a new research note, Action Economics blamed yesterday’s weak June report on consumer spending on “rising public fear over the impending fiscal cliff.”
As it is, economists think the economy will be lucky to grow 2 percent for the rest of the year, after growing just under 2 percent in the first half. In the past, economic growth that slow for that long has led to a recession 70 percent of the time.
Now add a big, fat tax hike into the mix.
Letting just the upper-income tax hikes expire would cost nearly a million jobs, according to consultancy Ernst & Young. And it could push 2013 GDP growth to under 1 percent. That’s far too weak to produce many jobs or make paychecks bigger. Another year of Stagnation Nation.
And if the all those tax hikes actually take place? Well, megabank Citigroup is telling its clients that the entire fiscal cliff (which also included $65 billion in scheduled military and Medicare spending cuts) would knock a whopping four percentage points from GDP growth next year.
And even the White House is predicting GDP growth of only 2.7 percent next year — so we’re talking about a fairly nasty downturn and possibly a return to double-digit unemployment. That’s moving backward, not forward. The Obama campaign might need a new slogan.
Even letting the issue linger into 2013 might be enough on its own to snuff out the anemic recovery. What business would want to buy pricey new equipment or hire lots of new workers on the hope that Congress quickly gets its act together after what’s likely to be an extremely close and divisive election?
Even if Mitt Romney wins, the Republicans take full control of Congress and they all agree to kill these tax hikes, it still might take until summer before they get it done over fierce Democratic opposition.
In a sane Washington, Congress would immediately pass at least a temporary extension of all the tax cuts, while promising to work on Simpson-Bowles-style tax reform, lowering marginal tax rates while killing loopholes. But that won’t happen when Team Obama is trying to get the president re-elected with an all-out populist campaign against the “1 percent.”
Maybe that cynical strategy will indeed let Obama return to the Oval Office in 2013. But it’ll leave him facing a recession rerun — and probably wishing it hadn’t worked.