Photo: Deutsche Bank
‘Taxmageddon’ is the preferred description of David Leonhardt at The New York Times to describe the unique fiscal situation due to happen at the end of this year.Basically, with no changes to current law, taxes will rise for everyone, and after tax, inflation-adjusted income for the average American will drop to 1998 levels.
As Leonhardt puts it: “All in all, the end of 2012 will be unlike any other time in memory for the federal government.”
At this point, many of our readers will already be familiar with the stakes. It’s not just the Bush tax cuts that are due to expire, but mandatory spending cuts agreed to during the debt ceiling debacle are supposed to kick in as well.
In theory, 5 per cent of GDP could be gone.
The interesting question is: What election outcome makes it easiest to avoid this “Taxmageddon”?
Leonhardt comes to the same conclusion we have: ROMNEY.
With Mitt Romney in the White House and a Republican House, the uncertainty might be less. Unless Congressional Republicans and a defeated Mr. Obama somehow came to a deal, they could wait for him to leave town before retroactively extending the Bush tax cuts, so long as they could win over a small number of Democratic senators. Republicans could likewise undo the Pentagon cuts.
To hold down the deficit, Mr. Romney and Congress could then cut domestic programs, including Medicaid, more sharply than Mr. Obama has. But recent history — both Mr. Reagan’s administration and the second Mr. Bush’s — suggests that Republicans would probably not find enough spending cuts to offset their tax cuts and instead would accept larger deficits.
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