“Taxmageddon”, or the tax increase and spending cuts set for start of 2013, is fast approaching. This happens to coincide with the timeline for the debt limit which complicates the picture, writes Peter Orszag in his latest Bloomberg View column. Orszag, vice chairman of global banking at Citigroup, sees three alternatives to “Taxmageddon”. A Romney win would like see a temporary deal to reinstate tax cuts and raise the debt limit. In the event of an Obama win a deal could be struck before January 1, or an fuzzy framework agreement could be adopted during a lame-duck session.
But Orszag says given the problems of the lame-duck session the most likely scenario is one in which all tax cuts would expire:
“In January 2013, the economy would be hit with a major fiscal contraction, market anxiety would rise, and both sides would blame each other for Washington’s dysfunction. But there would be a silver lining: The debate could then move away from the question of which tax cuts to extend.
If we get to this point, the administration could step forward with an entirely different concept for decreasing taxes. It could propose, for example, large increases in the payroll- tax holiday and in the standard income-tax deduction. This would reduce taxes for everyone, but do it in a much more progressive fashion than the Bush tax cuts did. The net result of the new tax cuts and the expiration of the Bush ones would be higher taxes for upper-income people, as the administration desires.
The president could then dare the Republicans to vote against the new universal tax cut. Republicans would have a harder time withholding support for such an across-the-board tax cut in early 2013, once the Bush tax cuts are water under the bridge, than they would have had holding firm on extending all the Bush tax cuts in late 2012.”