Allowing income tax rates to rise for wealthy Americans, and not for the less affluent, would not hurt US economic growth much next year, the US Congressional Budget Office (CBO) said on Thursday, stepping squarely into a dispute between Republicans and Democrats over how to resolve the so-called “fiscal cliff.”
The report by the authoritative non-partisan arm of Congress is expected to fuel US President Barack Obama’s demand for higher taxes on the rich, part of his way of avoiding the full impact of the expiring tax cuts and across-the-board spending reductions set to begin early next year unless Congress acts.
Republicans argue that any tax increases would be devastating to the economy, particularly to small businesses and to US employment rates.
The disagreement over the tax cuts is a major roadblock to any agreement in Congress, as it is coupled with the spending issues also on the table. The lack of progress in ending the standoff is spooking global markets, which fell again yesterday in part because of political uncertainty in Washington.
The CBO said that extending all of the tax cuts would boost US GDP growth next year by a little less than 1.5 percentage points. If the tax rates were extended only for individuals earning less than US$200,000 and couples earnings less than US$250,000, growth would rise by 1.25 percent, it said.
Should the fiscal deadlines pass with no action by Congress, the CBO repeated its earlier forecast that they would deal a crushing blow to the US economy, pushing it into a recession next year, with GDP shrinking by 0.5 percent and the unemployment rate spiking back to 9.1 percent.
Wall Street estimates show third-quarter GDP growth was 2.8 percent. Unemployment last month was 7.9 percent.
Eliminating the automatic spending cuts to military and domestic programs would add back 0.75 percentage points of growth, as would extending an expiring payroll tax cut and long-term unemployment benefits that are expected to end next year, the office said.
However, it also warned of consequences to taking such actions without reducing deficits that have run at US$1 trillion in each of the past four years.
“[The] CBO expects that even if all of the fiscal tightening was eliminated, the economy would remain below its potential and the unemployment rate would remain higher than usual for some time,” the report said.
With only five days remaining before the US Congress begins its post-election session, top political leaders in Washington provided little new assurance on Thursday that they can act in time, putting their own interpretation on the CBO report and highlighting elements that suited their position.
A statement from the Republican-controlled House Ways and Means Committee said the CBO report “confirms that raising taxes on all taxpayers will result in fewer ‘help wanted’ signs hanging in the windows of businesses across the country. Job creators agree and have made it clear that raising taxes will result in a weaker economy and fewer jobs for the millions of Americans struggling to find work.”
Democratic Senator Max Baucus, chairman of the Senate Finance Committee, said the CBO study “reaffirms the serious economic risk America faces if we fail to deal with the fiscal cliff.”