A time bomb is set to go off in the next few months that could destroy the fragile economic recovery now underway, leading to a surge in unemployment and more misery for many American families. Most economists agree that now is not the time to raise taxes and make deep cuts in federal spending. But this is what will happen if the president and Congress fail to reach an agreement.
The Bush era tax cuts will expire at the end of this year. Both Democrats and Republicans agree that the tax cuts should be kept in place for most Americans. But the president believes wealthier Americans with incomes over $250,000 should pay more in taxes (“shared sacrifice”) and so their tax cut should expire. Republicans oppose this move, though some are willing to consider other tax reforms, such as closing loopholes that allow wealthier individuals to avoid tax payments. If some agreement is not reached, Americans could pay $347 billion more in taxes in 2013 alone.
Meanwhile, automatic spending cuts are slated to go into effect next year – a 9.4 percent reduction in funding for defense programs and a 8.2 percent cut in domestic programs, including Medicare. Neither the president nor the Republicans favor these automatic cuts; they were approved in 2010 with a delayed effective date on the assumption that a more nuanced budget deal could be worked out later. So far that hasn’t happened and “sequestration” is on the way unless a compromise can be found. The non-partisan Congressional Budget Office projects allowing these cuts to go into effect could raise the unemployment rate to 9.1 percent by the end of next year.
Doing nothing is not an option for another reason. The federal deficit continues to soar. When lawmakers failed to reach a plan to reduce deficits in 2010, Standard & Poor’s downgraded the U.S. credit rating. That same year a commission established by President Obama issued a report declaring: “Our challenge is clear. America cannot be great if we go broke.” The budget plan issued by the co-chairs of the commission – Erskine Bowles (former White House Chief of Staff in the Clinton Administration) and Alan Simpson (former Republican Senator) – called for nearly equal parts of revenue increases and spending cuts. While some consensus is developing around the Bowles-Simpson recommendations, most economists warn that too high a tax increase or too steep a cut in federal spending could put the current economic recovery in reverse.