• Happy new year?

    I was already aware of four challenges to the economy and policy facing us on or about January 1, 2013:

    On January 1, 2013, the 2-year extension of the Bush tax cuts is scheduled to expire. If it does, income tax rates will increase for nearly all taxpayers. On the same day, the current patch to Medicare’s Sustainable Growth Rate (SGR) expires, threatening to decrease payments to physicians by about 30%. Furthermore, as agreed on during last summer’s showdown over the US debt ceiling, $1.2 billion in cuts to defense and other domestic spending, including a 2% cut to Medicare, are scheduled to commence at the turn of the year. As if that’s not enough, the current debt ceiling will probably be reached this fall or early winter, forcing another potentially contentious vote to raise it.

    What has just been brought to my attention (h/t Tyler Cowen) is that there are at least three more:

    Even if the Bush tax cuts are extended and the sequester delayed, a huge amount of fiscal drag remains in place. They include the expiration of the payroll tax cut, the expiration of extended unemployment insurance benefits, imposition of a new 3.8% Medicare investment tax on the wealthy.

    Fortunately, we have efficient and constructive political and legislative systems that can easily handle all these challenges. What could possibly go wrong?


    • Isn’t the impact of several of these likely to be net neutral for average Americans and positive for the national budget? i.e. the expiration of the Bush era tax cuts, which mostly benefit the rich, and the new Medicare tax on the wealthy? Won’t these in fact offset some of the impact of the others?

    • Ugh, Couldnt you find something a little more cheery this morning to write about? Like, maybe cancer mortality statistics?


    • Most of the tax increases will be a net positive for the economy. I have never believed the Republican mantra that taxes slow the economy. Many developed countries function very well with tax rates much higher than the US.
      The domestic spending cuts and expiration of extended unemployment benefits will be a drag on the economy. Hopefully these will be fixed. (I am hopeful but not optimistic.)

      • Increasing taxes on the already strained middle class will definitely harm a weak economy. If this understanding is not universally held by economists, it is certainly held by the vast, vast majority of them. See also the latest CBO report.

        This is not inconsistent with the view that an economy can grow with higher taxes. A lot depends on timing and nature of taxation, as well as what else consumers have to do to get by. What will happen on 1/1/13 is an across the board tax increase without any increase in assistance for the middle class. That’s just a massive pay cut.