The U.S. economy could be facing a short recession to start 2013 if federal tax policies are not amended by then, according to the Congressional Budget Office.
Sweeping tax cuts and exemptions that were first enacted by Congress under President George W. Bush and subsequently extended during the Obama administration are set to expire on Dec. 31, 2012, should Congress not take further action.
The looming “taxmageddon,” as dubbed by some, would likely push the U.S. economy into a short recession according to the CBO.
According to CBO estimates, the tax and spending policies that will be in effect on Jan. 1, 2013, under current law will reduce the federal budget deficit by 5.1 percent between 2012 and 2013.
Under those fiscal conditions, however, annual economic growth would total just 0.5 percent, CBO expects ”“ with the economy projected to contract at an annual rate of 1.3 percent in the first half of 2013 before expanding at an annual rate of 2.3 percent in the second half of the year.
“Such a contraction in output in the first half of 2013 would probably be judged to be a recession,” wrote CBO researcher Benjamin Page.
Any immediate reduction in taxes for 2013 without offsetting revenue further down the line would result in the federal debt – already at its highest level since 1950 as a percentage of the U.S. gross domestic product -Â ballooning further.
“Such a path for federal debt could not be sustained indefinitely, and policy changes would be required at some point,” Page stated.
Added Page: “If policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.”
In Connecticut, Comptroller Kevin Lembo has projected a $200 million deficit for the state’s current fiscal year ending this June, based on April”™s tax receipts and refunds.
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