All the Bush-Era tax cuts are set to expire at the end of this year, meaning Obama needs to act, and act fast if he wants to avoid raising taxes across the board. Or is there something else in his mind? B&E catches up with the US Congressional Budget Office, Moody’s and others for an intensive analysis.
|
 It
was spring of 2001. The first Harry Potter film had yet to arrive in
theatres and September 11 was just another day in the calender. Even the
United States Federal Budget was running a surplus as usual. In fact,
earlier in the year the US Congressional Budget Office (CBO) had
estimated the nation’s budget surplus to be around $281 billion in
FY2001, largely the result of several years of rapid economic growth.
Though CBO observed some weakening in the economy, it was sure that by
2011 the budget surplus would reach $889 billion. It was in this context that the Congress had passed, and the then President George W. Bush had signed into law (in June 2001) broad tax cuts that would cost US economy a whopping $1.35 trillion over the next 10 years. Two years later, Bush again enacted a new set of tax cuts, this time costing an additional $350 billion. Not only both tax cuts were massive and helped Bush win a second term in White House, but were also considered to be good moves by policymakers. However, it’s once again decision time for policymakers in US as both laws are set to expire on December 31, 2010. And if Congress does nothing (as it appears as of now), taxes will rise for every American starting January 1, 2011, aggregating $300 billion per year, or about 2% of GDP (as per CBO). Interestingly, this decision has to be taken in a fiscal environment that is exactly opposite from the one in which the tax cuts were enacted. Instead of a surplus the federal budget has a $1.4 trillion deficit (at the end of FY2009). No doubt, there is wide agreement that allowing all the tax cuts to expire on December 31, 2010 makes little sense given the economy’s fragility. Doing so would almost certainly trigger a renewed recession. But then making the tax cuts permanent for all taxpayers, regardless of income, will not only widen the federal deficit but will also inflate the national debt phenomenally. There are certainly several options on the table, but each one seems to come with a big price tag. One option is to extend the tax cuts indefinitely, making them permanent for all taxpayers, regardless of income (as Republicans want). But exercising this option, would cost US economy a whopping $3.1 trillion over the next 10 years and inflate the national debt to 82% of GDP. This would be the highest level since 1948, and well above the average debt-to-GDP ratio of the last 50 years of 37%.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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Thursday, September 06, 2012
It’s time to act, Mr. President
