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August 2, 2012

Taxmageddon Demands Corrective Action, Not Corrosive Rhetoric

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With a high-stakes election just around the corner, the high-stakes rhetoric is flying. But with Taxmageddon looming, America needs less political rhetoric and some serious legislative action.

Taxmageddon, of course, is the package of tax hikes costing $500 billion in 2013 alone. It will strike the economy on New Year’s Day if Congress continues to twiddle its thumbs. This “perfect storm” of taxes includes the automatic expiration of the Alternative Minimum Tax patch, the 2001 and 2003 tax cuts, the “tax extenders” package and the payroll tax, with a healthy load of new Obamacare tax hikes on top.
 
The worst time to increase the tax load is when the economy is already hurting, and the U.S. economy is already on the disabled list.. Take the jobs picture. Unemployment stubbornly hovers around 8.2 percent, leaving nearly 13 millions Americans still out of work—and millions more just plain giving up looking. It’s a far cry from President Obama’s promise of around 5.5 percent unemployment if his stimulus package was passed.
 
The trouble extends well beyond the job market. Consumer confidence is down, and manufacturing activity has fallen to a level not seen since 2009. As one dismal report follows another, it has become clear that the economy is stalling if not heading outright into recession.
 
This certainly isn’t because the rich are not “paying their fair share.” Rather, the economy is faring so poorly because of very threat of Taxmageddon is causing businesses to pull back on plans for investment or growth today.
 
Just last month, Federal Reserve Chairman Bernanke pointed out such perils of Taxmageddon. Yet President Obama, along with Senators Harry Reid (D-Nev.) and Patty Murray (D-Wash.), seem determined to stick to their “fairness” agenda, calling for the tax hikes on those earning over $200,000 ($250,000 for married filers). This class warfare “solution” may be smart politics, but how would the soak-the-rich approach actually help the economy? 
 
Not well, as it turns out. A recent study by Ernest and Young found that small businesses (called flow-through businesses) which would fall prey to this tax hike employ over half of private sector workers. Hiking their taxes would cost the economy some 710,000 jobs next year alone. After-tax wages would fall nearly 2 percent.  Yet somehow, according to Sen. Murray, not raising these tax rates would be throwing the middle class under the bus.
 
That position flies in the face of warnings from a growing list of economists, market shapers and institutions such as Alan Blinder, Nouriel Roubini, Mohammad Al Erian, National Federation of Independent Businesses and the U.S. Chamber of Commerce. They are calling for an extension of all current tax policies--including those at the top. 
 
Yet a small number of members—though generally opposed to tax hikes—are reportedly weighing the option of letting “tax cuts for the rich” expire, in exchange for preventing the sequester’s automatic spending cuts on defense. These members are right to be concerned about defense. Secretary Panetta himself has argued consistently that the sequestration cuts would seriously harm our national security. But hiking taxes to pay for it would simply solve one problem by creating another. The shaky economy would suffer and workers would lose.
 
But there is more to Taxmageddon than the 2001 and 2003 tax cuts which spawned this battle over “fairness”. There is also the patch for the Alternative Minimum Tax (AMT) which will protect 30 million middle-income taxpayers from higher taxes. 
 
And of course there is Obama’s own tax cut: the two percentage point reduction in the payroll tax rate. If it is allowed to expire, the very families that the president and his Senatorial colleagues supposedly want to look out for will be hit by a tax hike. A family earning $50,000 a year would have $1,000 less in their pockets to buy groceries or gasoline. Apparently, the “fairness” agenda doesn’t really apply to the very lower and middle class. 
 
Rather than perpetuating the partisan paralysis that has disenchanted ordinary Americans with Washington, Congress should prevent Taxmageddon for all taxpayers. They should extend current policy for a reasonable period – say, a year. This would give certainty to businesses, investors and families that their taxes will not go up on January 1. And it would then lay the groundwork for a fundamental overhaul of the tax code by the new Congress and president. 
 
Alison Acosta Fraser is director of The Heritage Foundation’s Roe Center for Economic Policy Studies.

First appeared in The Hill.

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