• The Heritage Network
    • Resize:
    • A
    • A
    • A
  • Donate
  • Forecast: Taxmageddon Would Cause Another Recession

    Speaking this week at the Western Economic Association International, economic forecaster Allen Sinai talked about the damage the “fiscal cliff” of 2013 will cause the economy. Sinai concludes that a recession is unavoidable if Congress does not act to fix the fiscal cliff.

    The fiscal cliff has two components: (1) Taxmageddon, a $494 billion per year increase in tax increases set to take effect on January 1, 2013, and (2) federal spending cuts of about $135 billion.

    In the large-scale economic model that Sinai’s Decision Economics Inc. uses to predict economic growth and fluctuations, the fiscal cliff has catastrophic consequences, but those consequences are not symmetric.

    In Sinai’s model, a $350 billion tax increase—Sinai’s analysis shows that even a modest estimate of the 2013 tax increases has a huge, negative economic impact—would lower growth in 2013 by two percentage points and by more than two percentage points in 2014. The negative effects would persist until the long-run trend aspects of the model outweigh the effects of current policy. Given that growth in the U.S. has hovered around 2 percent throughout the recovery-less recovery, a $350 billion tax increase alone would reduce growth to zero for years.

    In addition to the tax increases, Sinai modeled the effects of $135 billion in spending cuts. These resulted in about one percentage point lower GDP growth in 2013. Since GDP can be broken down into separate categories (government spending, consumption, investment, and net exports) and 1 percent of GDP is about $150 billion, the fall in government spending would have no measurable impact on the private economy in 2013.

    In the years after 2013, the spending cuts actually yield a small increase in GDP in Sinai’s model—to the tune of two-tenths of a percentage point per year. That implies that decreasing government spending will increase future private economic activity on a better than one-to-one basis.

    Lastly, Sinai emphasized that all those tax increases would have such a negative effect on spending that the deficit would shrink for only one year (2013) and would grow thereafter relative to a baseline with no fiscal cliff.

    Other members of the panel had valuable insights as well. John B. Taylor of Stanford emphasized the importance of making economic policy based on consistent rules. As a frequent advisor to the U.S. government and a former Under Secretary of the Treasury, he recalled the pressure for government to “do something,” which made policy less predictable and sound. John C. Williams, president of the Federal Reserve Bank of San Francisco, expounded on Sinai’s and Taylor’s points. In discussions with business leaders from the nine states of Williams’ district, the topic of policy uncertainty came up again and again. Businesses do not want to hire or invest while tax rates and other future government policies are unknown.

    Washington should stop Taxmageddon as soon as possible.

    Posted in Featured [slideshow_deploy]

    5 Responses to Forecast: Taxmageddon Would Cause Another Recession

    1. Paul Herbig says:

      Even Kings in the Middle Ages knew you did not prosper by starving the peasants to death. Keep taxing them and sooner or later they will either rebel or stop working and then your income goes to zero.

    2. HPD says:

      The ECON101 illiterate, corrupt, marxists will NEVER comprehend the FACT that in order to have a secure public sector, a thriving, nurtured, and dynamic private sector is critical.

      Tax increases only hinder this process…

    3. Bobbie says:

      Start fresh! Stop paying all taxes and determine the worth as it's needed. I mean, democrats want to get drastic on us as they belittle society to imply the belief of democrats is that people aren't expected to help ourselves even though America has proven them wrong. So how about democrats do their work without pay since it's waste work to those of average minds? That would show sincerity, reduces taxes and needless to say, help alot!

    4. elliott says:

      We're in a great depression. Tax increases won't cause another recession as we've never recovered from 2007.
      Why does media and Washington continue to make us think that there is such a thing as a "great recession"?
      Go read any basic economics text-bad recession is a depression. This is economic armageddon and failure of Corporate America's Congress will make this clear to all by 2013.
      The biggest hog of tax dollars is military. Who is going to attack US? Slash military spending by at least 50%!
      F-35 program has cost over sixty-six BILLION dollars since 2001! For 101 aircraft that USAF doesn't want. That is over $600,000,000 for each unwanted, not needed, aircraft. Who is getting rich there? DOD spent $150,000,000 for a hospital in Afghanistan for the Afghan medics to demand bribes before Afghans can get treatment! This is on top of a war that will never be won, has cost thousands of OUR troops their lives and billions of our tax dollars.

      Ten billion dollars spent buy our government results in a ninety billion dollar economic activity in US based on propensity to consume of 90%. Ten Billion dollars spent in Afghanistan only helps Raytheon, Haliburton and other military-industrial corporations. Haliburton moved out of US-they in particular shouldn't get any US
      government contracts unless they pay equivalent taxes, say 15%. The propensity to consume, for non-economists, simply means we all spend 90% of what we earn, and so on down the line.
      God bless America.

    5. Rcdatzme says:

      I say let the tax hikes go through, just as planned. The Democrats get all they asked for, Harry Reid gets to take responsibility for the crushing affects, the takers get their entitlements slashed, the middle class and rich take a hit, but the smart ones that have been seeing this coming survive to explain the truth, in the sea of lies, by the media, about the "reality of econonomics" to the masses. Media will finally lose all credability. The populace must be hurting, to finally see the error of their ways and understand, "There is no free ride, there is no public sector without a strong private sector, so loosen the stranglehold on enterpeurialism, capitalism and free markets. The recovery should be swift.

    Comments are subject to approval and moderation. We remind everyone that The Heritage Foundation promotes a civil society where ideas and debate flourish. Please be respectful of each other and the subjects of any criticism. While we may not always agree on policy, we should all agree that being appropriately informed is everyone's intention visiting this site. Profanity, lewdness, personal attacks, and other forms of incivility will not be tolerated. Please keep your thoughts brief and avoid ALL CAPS. While we respect your first amendment rights, we are obligated to our readers to maintain these standards. Thanks for joining the conversation.

    Big Government Is NOT the Answer

    Your tax dollars are being spent on programs that we really don't need.

    I Agree I Disagree ×

    Get Heritage In Your Inbox — FREE!

    Heritage Foundation e-mails keep you updated on the ongoing policy battles in Washington and around the country.