CBO: Taxmageddon is real, people

It’s not new, either.  Thanks to the compromise cobbled together in the lame-duck Congress after the 2010 midterms, everyone knew that the big issues on tax rates got punted to after the 2012 elections.  The same thing was true of spending cuts in last summer’s debt-ceiling fight.  Both parties planned to run on their approach to solving the problem, and then hashing it out after this election before time ran out.  A new CBO report might put pressure on Congress to address it before the election:

Tax hikes and spending cuts set to take effect in January would suck $607 billion out of the economy next year, plunging the nation at least briefly back into recession, the nonpartisan Congressional Budget Office said Tuesday.

Unless lawmakers act, the economy is likely to contract in the first half of 2013 at an annualized rate of 1.3 percent, the CBO said, before returning to 2.3 percent growth later in the year.

Canceling those tax and spending policies would protect the recovery in the short run and encourage more vibrant growth, around 4.4 percent, in 2013, the CBO said. However, unless lawmakers adopt policies that would reduce budget deficits by a comparable amount down the road, the CBO said, the national debt would continue to climb, imperiling future economic growth.

The problem with waiting it out is that businesses have to calculate investments in the near term based on best estimates of demand in the next year.  They already face a bewildering array of ambiguities on the regulatory front, from whether ObamaCare will exist at all and what forms the still-missing regulations will take, to energy prices thanks to regulatory attacks on coal and natural-gas extraction, labor-organizing rules, and the heavy burdens of Dodd-Frank, among many others.  The economy appears to have slipped deeper into stagnation already, and continued ambiguity on taxes will only make that situation worse.

Sen. John Thune told Fox News that Congress simply can’t wait to act, if they want to avoid significant economic damage:

Don’t expect an early resolution to the issue.  Both sides want to run on tax policy in this election.  The only way this might get resolved is if the White House decides it needs a boost to the economy this summer, which a definitive resolution might produce.  After all, once businesses see a light at the end of this particular tunnel, they can put some investment back into their operations and plan for a non-recessionary 2013.  If the economy and job creation continue to drag in May and June, Democrats might be willing to cut a deal — or at least kick the can down the road for another couple of years, allowing everyone to still debate the topic until November without damaging the economy.

It’s not just Taxmageddon that we should fear, either, as Suzanne McGee argues at The Fiscal Times. We may have to deal with Drachmageddon, too:

It’s a stark dilemma – how to properly balance growth and fiscal health – and it is one that already is making investors extremely uneasy. The closer we come to the November elections, the more it is likely that those jitters will shape the direction of the stock market, regardless of who seems likely to win the White House or end up dominating Congress, since neither party seems prepared to give way on these issues, which already have come close to shutting down the federal government.

Not ominous enough? Well, there is the ticking time bomb now being referred to as “drachmageddon,” or the prospect that Greece will abandon – or be forced out of – the Eurozone in the near future. European politicians, including British Prime Minister David Cameron, have taken to the airwaves to huff and puff about the apparent wish of Greek voters to possess and simultaneously devour their cake. “They cannot just vote for saying, ‘could people just carry on giving us some money so we do not have to change anything,’” Britain’s Justice Secretary Kenneth Clarke (a former chancellor of the exchequer) pointedly warned, cautioning the Greeks against the ramifications of electing “cranky extremists.”

The news on “drachmageddon” – or the possibility that the Greeks will wake up one morning this summer to find that the Euros in their bank accounts have been swapped back into drachma, their pre-Euro currency – wasn’t any better today. An EU summit is scheduled to take place in Brussels, but leaders aren’t speaking with a single voice in the discussions with Greece. German Chancellor Angela Merkel has signaled some willingness to compromise, but her views still remain poles apart from those of her newly elected French colleague, French President Francois Hollande.

At least we have the ability to right our own ship … for the moment.

• Fiscal conservatism on the decline?
• EU officials now fretting over Europe’s conspicuously higher energy prices
• Ireland: Yes, we have sweet international tax incentives, sorry we’re not sorry

Blowback