Impending ‘fiscal cliff’ tax increases could threaten US growth and push the economy back in to recession.
The US faces a perfect tax storm as a raft of measures aimed at cutting tax for individuals expire or approach renewal at the same time.
The key date is January 1, 2013.
Congress estimates tax increases triggered on that day could jump to US$310 billion as the Bush tax cuts, the Alternative Minimum Tax deal and payroll tax reduction end, while child tax credits are halved and estate tax reverts to 2001 levels.
And that’s only part of the story as other tax incentives are due to finish and $1.2 trillion of spending cuts kick in.
The fear is if Congress fails to act, the country will slide back in to recession.
The situation is exacerbated by November’s presidential elections which have effectively tied the hands of Congress to make any serious financial decisions before the new president is voted in.
“With the fiscal crisis we’re facing at the end of the year, Congress needs to come together and agree on a combination of revenues and spending cuts. It’s the only way forward,” said Max Baucus, chairman of the Senate Finance Committee, which met to discuss the problem.
“Alternatively, cancelling the automatic savings in spending and extending all of the expiring tax cuts would tell the American people and the world that we are not serious about our deficit problem. This is an opportunity for us to come together to pass a balanced solution that puts us on a sustainable path for the future.”
Baucus is calling for a balanced and fair deficit reduction plan that generates more revenue than current policy to fund the country.
He explained the plan should start with pegging debt as a percentage of GDP, while avoiding cuts that would knock the economy in the short-term.