The Two Issues that Can Bring Down the Economy
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The Fiscal Times
March 2, 2012

The term “crisis” is frequently overused in Washington, never more so than in budget debates. The problem is that a real crisis requires a hard deadline by which time something must happen or something terrible will happen.

There are two hard deadlines approaching, the need to raise the debt limit and expiration of all expiring tax cuts at the end of the year. These two action-forcing events, when combined with more than the usual political uncertainty over control of Congress and the White House next year, mean that the long-awaited fiscal crisis is now here.

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As we saw last year, Republicans are perfectly willing to risk default on the national debt to force action on their agenda. Many have said that they will never vote to increase the debt limit, no matter what. Now Republican presidential hopeful Mitt Romney is piling on by criticizing Rick Santorum, his principal opponent for the GOP nomination, for having voted in favor of raising the debt limit while in the Senate.

Eventually, Republicans agreed to a deal that would raise the debt limit in return for $1.2 trillion in automatic budget cuts, apportioned equally between domestic and defense spending. Unless the law is changed, these cuts will take effect on January 1. Both Republicans and defense officials in the Obama administration are alarmed by the impact of these impending cuts.

More importantly, congressional Republicans and the Treasury both thought that the debt limit increase that had been agreed to was sufficient to get past the election. Now it appears that this may not be the case and it will be necessary to raise the debt limit before the election to avoid a default that would roil world financial markets to their core.

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Finally, there is the expiration of all the tax cuts of the George W. Bush administration and the temporary cut in the payroll tax that was enacted as a stimulus measure. Without action, the payroll tax will rise by 2 percent, the top income tax rate will rise to 39.6 percent from 35 percent, the tax on dividends will rise to 39.6 percent from 15 percent, and the capital gains rate will rise to 20 percent from 15 percent. There is a long list of other expiring provisions as well.

Bruce Bartlett’s columns focus on the intersection of politics and economics. The author of seven books, he worked in government for many years and was senior policy analyst in the Reagan White House.