CBO: Letting upper-income tax cuts expire would barely hurt economy

November 8, 2012

The Congressional Budget Office warned again in a report released Thursday that the U.S. economy could get slammed back into recession, with unemployment hitting 9.1 percent by the end of next year, if President Obama and Congress don't act to avert the fiscal cliff.

But there were other interesting nuggets in the report, as well. In particular, the CBO gave its most detailed look at how the expiration of the Bush-era tax cuts would affect the economy. Apparently, it would do little harm, the numbers show.  Here's the key graph:

The above shows how big each policy is as a share of the total impact of the cliff. Some policies are more important on the budget side than the GDP side. Letting the high-income Bush tax cuts lapse, for example, generates $42 billion in 2013 but hardly hurts GDP at all. By contrast, the defense cuts amount to $24 billion but hurts growth by 0.4 percent — quadruple the high-income cuts' impact.

The report also drives home how much the cliff is a tax phenomenon. The sequester makes up less than 13 percent of the total deficit reduction the cliff accomplishes. The other 87 percent, except for the expiration of the unemployment insurance extension, is all tax increases: income, estate and capital gains increases from not renewing the Bush-era tax cuts, payroll tax increases from letting those cuts expire, and expiring stimulus tax credits (included in the payroll/unemployment insurance category in the above chart).

The CBO has predicted before that the nation would fall into recession if the fiscal cliff is not averted before the end of the year, when automatic spending cuts and tax increases would go into effect.

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Ezra Klein · November 8, 2012

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