Harvard’s Feldstein: Obama’s Tax Hikes to Spark New Recession

Tuesday, 20 Mar 2012 07:09 AM

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Martin Feldstein, former chief economic adviser to Ronald Reagan, says the most important cloud on the economic recovery horizon is the large tax increase that will occur next year unless legislation is passed to block it.

"The Congressional Budget Office predicts that, under current law, the revenue of the federal government will rise from $2.4 trillion in the current fiscal year, which ends in September, to $2.9 trillion in the following fiscal year," Feldstein writes in the Financial Times.

That increase of $512 billion is equivalent to 2.9 percent of GDP, bringing federal revenue as a share of GDP from 15.8 percent this year to 18.7 percent next year, notes Feldman, a professor of economics at Harvard University.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

The higher revenue would reflect an increase in personal tax rates, higher payroll taxes, as well as higher taxes on dividends, capital gains and corporate incomes. Revenue would continue to rise in future years – as a share of GDP it would increase to 19.8 percent in 2014 and would stay above 20 percent for the remainder of the decade.

"A sustained tax increase of that magnitude would push the U.S. into a new and deep recession next year,” says Feldman. “So, it is important to recognize that legislation is required to prevent such a tax rise.”

Feldstein believes getting that legislation passed will be difficult.

“Mr. Obama has said he wants to keep the high rates for upper income taxpayers and to raise total taxes on corporations and other businesses,” Feldstein observes.

“The Republicans in Congress and the Republican presidential candidates have indicated they want to avoid all of the increases that are specified in the current law and to start a process of tax reform.”

“So the 2013 tax rates will depend on the outcome of the presidential elections in November.”

Other experts are also painting a bleak future for the U.S. economy.

Princeton economist and former Federal Reserve Vice Chairman Alan Blinder says the United States is cruising toward a 2013 "fiscal cliff."

"As tax cuts expire and spending falls, the economy will be hit with a 3.5 percent decline in gross domestic demand," Blinder writes in The Wall Street Journal.

Blinder says a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013 — unless Congress takes action to avoid it.

“And if you're like me, the phrase ‘unless Congress takes action’ sends a chill down your spine — especially since the cliff came about because of Congress's past inability to agree,” says Blinder.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here


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